- The Tax Cuts and Jobs Act will reduce income taxes for 80 percent of taxpayers
- Lowering the corporate tax rate will benefit workers – mostly middle class
President Trump is expected to sign into law this week the Tax Cuts and Jobs Act, the most significant reform to the federal tax code since 1986, after passage by the Senate early Wednesday morning and final House passage Wednesday afternoon.
“This is one of the most important pieces of legislation Congress has passed in decades. . . . For all those millions of Americans struggling paycheck to paycheck, help is on the way,” House Speaker Paul D. Ryan (R-Wis.) said after the House vote. “This is a good day for workers . . . and a great day for growth.”
The reform will immediately cut income taxes for roughly 80 percent of American taxpayers, even according to the left-leaning Tax Policy Center(TPC) The average tax cut will be about $1,600 according to the TPC, with Republicans citing a reduction of $2,000 for the average family of four.
The relative few who will see their taxes increased are largely high-income earners from high-tax states.
Such facts dispel the notion being pushed forth by critics that this would be a tax cut only for the rich and raise taxes on the middle class.
Critics also point out the corporate tax rate reduction from 35 percent to 21 percent as merely a ‘giveaway’ to corporations that does nothing for the middle class.
Research shows, however, that reductions to the corporate tax rate benefit workers almost exclusively in the form of higher wages. And according to US Census Bureau data, about 53 percent of all workers are employed by companies with more than 500 employees, while nearly 60 percent of all payroll comes from these large companies. The critics cannot deny that a significant portion of the middle class is employed by corporations, and thus stands to benefit from the corporate tax cuts.
Here is a list of the major components of the tax reform bill:
- Lowers individual income tax rates: The bill preserves seven tax brackets, but changes the rates and adjusts income thresholds for the new rates. Today’s rates are 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. The new rates would be: 10%, 12%, 22%, 24%, 32%, 35% and 37%.
- Nearly doubles the standard deduction: For single filers, the bill increases it to $12,000 from $6,350 currently; for married couples filing jointly it increases to $24,000 from $12,700. This will result in fewer people itemizing their deductions, simplifying the tax code for many.
- For some, however, this benefit may be muted by the elimination of the personal exemption. Today filers are allowed to claim a $4,050 personal exemption for themself, their spouse and each of their dependents.
- Eliminates the Obamacare mandate to carry health insurance or face a penalty.
- Reduces the current 35 percent corporate tax rate to 21 percent: The 35 percent rate was the highest of all industrialized nations, the lower rate will make the U.S. far more competitive.
- Caps state and local tax deduction: The final bill will preserve the state and local tax deduction for anyone who itemizes, but it will cap the amount that may be deducted at $10,000. Today the deduction is unlimited for state and local property taxes plus income or sales taxes.
- Expands the child tax credit: The credit would be doubled to $2,000 for each child under 17. The bill also increases the income maximum under which people can claim the credit, making it available to more taxpayers. The current income cap is $75,000 for single filers and $110,000 for married. The bill increases those caps to $200,000 and $400,000 respectively.
- Retains the mortgage interest deduction, but lowers the cap: Current mortgages are unaffected, but on mortgages moving forward filers would only be able to deduct the interest on debt up to $750,000, as compared to the $1 million current cap.
- Retains but reduces the impact of the Alternative Minimum Tax (AMT): The bill keeps the AMT but increases the income level for who must pay it.
- Preserves certain deductions, including medical expenses, student loan interest and classroom supplies bought by teachers: Indeed, the medical expense deduction would be increased for 2018 and 2019.
- Keeps the death tax, but doubles the exemption amount: Fewer people are thus obligated to pay the tax.
- Changes how U.S. multinational companies are taxed: Under current tax law, US corporations are taxed under a worldwide tax system. The U.S. is one of just a few industrialized nations subject to such a system. In short, this means that no matter where a corporation earns income, it is subject to the U.S. federal 35 percent corporate tax rate, even if it is also subject to the taxation of the country where the income was earned. Companies can avoid this double taxation, however, if they keep their profits in the foreign country. The current system discourages U.S. companies from making domestic investments in their businesses and workers, which hinders economic growth. Under this bill, the U.S. moves to a “territorial” tax system, in which foreign-source dividends and profits of U.S. companies are not subject to U.S. tax upon repatriation. The bill does include a low, one-time tax on existing overseas profits, however. This move would encourage more American companies to bring their profits to the U.S. for investment and job growth.