A Comprehensive Rundown of the GOP Tax Bill
January 13, 2018
Less than a week before Christmas, Congress finally passed its $1.5 trillion tax reform bill, its most significant legislative achievement since Donald Trump took office. The tax plan focuses heavily on promoting economic growth for corporations and redistributing taxes for individuals.
A key priority of the GOP tax bill is promoting economic growth in the United States by reducing taxes for corporations. The tax plan’s largest impact on corporate taxes is a reduction in the corporate tax rate from 35% to 21%. This change greatly increases corporations’ earnings by allowing them to retain an extra 14% of their profits.
Another important change to corporate taxes is a new 100% exemption for all foreign business earnings. In the past, the US government would apply the same 35% tax rate to all of a corporation’s earnings, foreign or domestic. This led many corporations to keep their money in foreign nations with lower taxes, slowing economic growth in the United States and keeping jobs away from Americans. The tax bill incentivizes American corporations to bring their earnings back to the United States to promote domestic economic growth.
In addition to corporate tax reform, the tax plan drastically restructures individual income taxes in two manners: rearranging income tax brackets and restructuring deductions.
Tax brackets determine an individual’s tax rate, or what percentage of their taxable income they must pay in taxes. For example, if an individual’s taxable income is $100,000 and their tax rate is 20%, they must pay $20,000 in taxes. The tax plan rewrites current tax brackets, keeping the same total of seven tax brackets as before, but capping the highest bracket at 37% as opposed to 39.60% and rearranging the other brackets. Under this plan, most Americans will pay a lower tax rate.
In addition to rewriting tax brackets, the tax plan also alters a number of exemptions, deductions and credits, which allow individuals to reduce the amount they pay in taxes. Exemptions and deductions reduce the amount of income the government can tax. If that same individual were to take a $10,000 deduction from their $100,000 income taxed at 20%, they would only have $90,000 in taxable income and therefore pay $18,000 in taxes instead of $20,000. In contrast, credits are a dollar-for-dollar reduction from paid income tax. Using the previous example, if that individual were to receive a $10,000 credit, they would only pay $10,000 in taxes.
The primary form of exemption most individuals in the United States currently take are personal exemptions. These personal exemptions presently apply to all individuals, allowing them to deduct $4,000 from their taxable income for each family member. Under the new tax plan, individuals can no longer take these $4,000 deductions.
Under our current tax code, individuals are offered the option to take either a standard deduction or itemized deductions from their taxable income. Previously, the standard deduction was a flat $12,000 reduction in taxable income while itemized deductions included, among other things, SALT deductions, equal to all of the income and property taxes paid to state and local governments. Residents of highly-taxed states like New Jersey and New York would likely take the itemized deduction since their SALT deductions would be higher. The GOP tax bill doubles the standard deduction to $24,000 from $12,000 and caps SALT deductions at $10,000 while it was previously uncapped These changes to SALT deductions and mortgage interest deductions decrease taxes for many Americans with low state taxes, particularly in the Midwest, but increase taxes for residents of highly-taxed states [2]. Another key provision of the tax bill increases the child tax credit, which reduces taxes for individuals and families with children. The new tax plan doubles the child tax credit to $2,000 from $1,000 previously, reducing the burden of taxes on millions of families [3].
One of the looming questions surrounding the newly passed tax bill is its impact on the U.S. national debt as tax cuts from the bill would create an estimated deficit of $1.447 trillion over the next 10 years [4]. Proponents of the tax bill laud its pro-business policies and an expected increase in economic growth over the next 10 years. However, critics cite economist projections that predict a 10-year deficit of around $1 trillion even after accounting for economic growth [5]. While these projections are by no means promises of the future, they do suggest that the tax bill will burden future generations with increasing interest payments on the U.S.’s national debt.
While the impacts of this bill are debatable, its passage indicates a worrying trend towards extreme polarization in American politics. The tax plan passed entirely along party lines by a vote of 227-203 in the House (12 Republicans voted against the bill) and a vote of 51-48 in the Senate with no bipartisan votes [6] [7]. This series of events echoes the 2010 passing of the Affordable Care Act along party lines 219-212. Again, the only bipartisan votes were Congressmen from the majority party voting against the bill [8].
This year, without Democratic votes to reach a 60 vote majority in the Senate, the GOP passed the tax bill using the Senate’s budget reconciliation process, which allows for a simple majority vote rather than the standard 60 votes [9]. In order to accommodate for the budget reconciliation process, the GOP was forced to allow individual tax cuts to expire on December 31, 2025, a provision which will eventually hurt ordinary Americans by nullifying tax cuts from the bill [10]. Such voting patterns are unhealthy to American democracy as they eliminate the possibility of bipartisan legislation that more effectively addresses the needs of all Americans. Future voters have the ability and perhaps the responsibility to start healthy conversations about politics and restore faith across the aisle.
[1] https://www.cnbc.com/2017/12/15/find-your-new-tax-brackets-under-the-final-gop-tax-plan.html
[3] https://taxnews.ey.com/news/2017-2130-tax-cuts-and-jobs-act-conference-agreement-released
[7] https://www.cnbc.com/2017/12/20/house-has-enough-votes-to-send-tax-bill-to-trumps-desk.html
[10] https://www.wsj.com/livecoverage/tax-bill-2017/card/1512003451
