The $ 1.5-trillion package to overhaul the U.S. tax system — a plan championed by Donald Trump as “a middle-class miracle” that’s polling at historically unpopular levels — is headed to the president’s desk to become law after Congress approved the reform along strict party lines.
Republican legislators who pushed the most sweeping changes to the tax code in some 30 years envisioned sharp cuts to income tax rates. They also promised a new, more straightforward system — a simplification that would be so dramatic it would allow most Americans to file their tax returns on the back of a postcard.
The truth is, well, more complicated.
Tax policy analysts identified the winners and losers from the overhaul, and parsed how closely the new plan mirrors what congressional Republicans promised.
On individual tax cuts
The good news is taxes will go down for most families, at least over the next year.
But the good times won’t last long, said Len Burman, a former U.S. Treasury official and the co-founder of the Tax Policy Center.
“All the individual tax cuts expire at the end of 2025,” he said.
Taxpayers in 2026 will end up paying higher taxes than under the current law. And in 2027, Burman said, more than half of Americans will see an increase.
While the individual tax cuts are due to end in eight years, the corporate tax cuts will be permanent.
“Advocates say don’t worry because Congress will extend all those individual tax cuts,” Burman said, but that’s an argument he has trouble buying, considering the $ 1.5 trillion in cuts over the next 10 years is expected to accelerate the growth of the debt from 77 per cent of gross domestic product today to about 91 per cent of GDP.
“It’s a weird argument. If we couldn’t afford to extend them now with debt at 77 per cent of GDP, how will we afford to extend them in 2025?”
A report last month from the Joint Committee on Taxation, a non-partisan congressional group, determined that households that earn six figures will likely pay less in taxes over the next decade. Lower- and middle-income households that make between $ 10,000 and $ 75,000 will likely end up paying more in taxes.
And wealthy real estate investors like Trump get a special perk, as the bill gives real estate investors a 20 per cent tax rate.
On corporate tax cuts
The tax bill lowers the corporate income tax rate to 21 per cent from 35 per cent.
That should make doing business and earning income in the U.S. more favourable than it was before, though whether large multinationals decide to relocate to the States remains to be seen.
Michael Graetz, who served as a senior tax policy official in the Treasury Department during the George H.W. Bush administration, says there’s also a loophole involving so-called “pass-through businesses” that he expects will be exploited to its fullest extent by business owners.
Pass-throughs are small unincorporated businesses, such as sole proprietorships, partnerships, LLCs and S-corporations, which are taxed through their owners’ personal returns and don’t pay corporate income tax.
A provision originally meant to help small businesses create jobs instead creates tax-sheltering opportunities, he said, as it allows for a deduction of 20 per cent on business income, with some limits, for pass-throughs.
Graetz said savvy lawyers will likely advise their wealthy business clients to reorganize their affairs to become pass-throughs.
On turbocharging the economy
The Trump plan relies on a trickle-down approach that believes less taxation on corporations will bring back American jobs and stimulate the economy.
Burman’s projections show the plan would boost the economy in the short term, owing to individuals having more money to spend and businesses having more after-tax income.
“But in the long run,” he said, “it’s going to be about a wash.”
He warned it may end up being a counterproductive approach if businesses have trouble meeting demand, leading to inflation and forcing the Federal Reserve to push up interest rates, and in turn making it harder for consumers to afford big-ticket items like cars and homes.
“So there’s certainly a risk that if interest rates responded significantly, the net effect could be negative,” he said. “This pro-growth tax plan could make the economy weaker than it would have been without it.”
At a news conference Wednesday, Trump promised that passage of the tax plan “means jobs. Jobs, jobs jobs.”
That, too, is a tough sell for Burman. He said the new plan is a shift to a “territorial” tax system. That means businesses would only be taxed on income earned inside the country. Most future foreign profits would be exempt.
It’s meant to discourage companies from parking profits in tax havens and to reinvest at home. But Burman said it could actually end up pushing multinationals to move operations overseas.
“This is supposed to bring jobs home, and it could have the exact opposite effect,” he said.
On tax simplification
There’s nothing new in politicians overpromising and under-delivering. But Graetz said the dream that most Americans’ tax returns will be so simple they could file them on a postcard remains out of reach.
“It just doesn’t match up with the rhetoric,” he said.
‘There are lots of opportunities in this legislation for tax breaks that were probably unintended.’ – Michael Graetz, former senior tax policy official in the Treasury Department
He acknowledged that some people who currently take the standard deduction will have simpler tax filing.
But the short answer to the postcard scenario is that the people who could soon, in theory, fill out taxes on a postcard under this new law could have done so previously anyway.
Obvious winners, Graetz said, will be lawyers and accountants who will be navigating new and complex international tax provisions and informing people about how to reorganize their business affairs.
“There are lots of opportunities in this legislation for tax breaks that were probably unintended,” Graetz said. “So the accountants and lawyers are certainly going to have a lot of time to work on this.”
An estimated 13 million fewer people will have health insurance, according to the non-partisan Congressional Budget Office.
The tax bill repeals the individual mandate under the Affordable Care Act, which requires most Americans have health insurance. The individual mandate includes a financial penalty for those lacking coverage, and is meant to ensure healthy Americans enrol, which helps to prop up the marketplace and offset the cost of covering people who are less healthy.
By scrapping the mandate, premiums could rise as those most likely to drop their coverage will be the healthiest individuals who don’t believe it’s of much worth to them, Burman said.
“There are a bunch of people who would probably be worse off as a result, but don’t know it,” he said.
Another concern, he said, is that those opting not to get health insurance might be people who could have discovered once they went to the Obamacare exchanges that they qualified for Medicaid, which is free health insurance for lower-income individuals.
Obamacare advocates believe the mandate is a helpful nudge that encourages people who might at first be reluctant to consider health insurance due to the cost to realize that getting coverage is ultimately in their bests interest.
“When people go to one of the [Obamacare] exchanges, and they’re told they’re eligible for free health insurance, presumably they’re pretty happy about that,” Burman said. “Without the mandate, a lot of people who become eligible for Medicaid wouldn’t be able to find out.”