The U.S. federal income tax reform drafted by the Republican Party and supported by President Trump is close to becoming law. The Tax Cuts and Jobs Act (TCJA) was introduced in the House of Representatives on November 2 and passed 227 to 205 on November 16. A similar bill was introduced in the Senate and passed 51 to 49 on December 2. This week the two bills were reconciled in a conference committee; Congress finalized a single version on December 15.
The bill's final version lowers the top individual tax bracket from 39.6% to 37% and lowers rates for other tax brackets too. Capital gains tax rates are unchanged. The standard deduction is increased to $24,000 for joint filers, but the personal exemption is eliminated. The child tax credit is doubled to $2,000, with $1,400 refundable. The mortgage interest deduction is capped at a lower amount, $750,000. The deduction for state and local taxes is capped at $10,000. Education deductions and credits are unchanged. The alternative minimum tax, or AMT, is changed to affect fewer taxpayers. The estate tax has been amended to affect only estates of at least $11.2 million, up from $5.5 million. Pass-through business income is reduced by a 20% deduction and subject to a lower top rate of 29.6%.
On the corporate side, the top marginal rate falls from 35% to 21%. The corporate AMT is eliminated. The business interest deduction is capped at 30% of income. The Section 179 expensing limit is doubled to $1 million. Net operating losses are limited to 80% of taxable income. A one-time tax of 7.5% on repatriation of overseas profits will be applied. The most important change is switching the U.S. from a worldwide system to a territorial system, meaning only profits earned domestically will be taxed.
Some controversial miscellaneous provisions are tucked into the bill. First is a repeal of the Affordable Care Act's individual mandate, starting in 2019. The repeal is estimated to save $300 billion while increasing the number of uninsured persons and health insurance premiums by 10%. The Arctic National Wildlife Refuge will be opened for oil and gas drilling for the first time.
The Joint Committee on Taxation estimates that the TCJA will increase national debt by $1.456 trillion over a decade. The Tax Policy Center estimates that 7% of taxpayers will pay more taxes in 2019 and 48% in 2027.
Yet the Trump administration and Republicans still argue that the TCJA will increase GDP growth and help pay for itself. They also maintain that the bill is a middle class tax cut, even though a significant number of middle class households will pay more after reform.
Congress still needs to vote on the final version of the TCJA in both houses before the President can sign the bill into law. The question is when Senator-elect Doug Jones (D-AL) is seated. If Jones is seated first, then the Republicans lose another key vote. Since the TCJA is more unpopular even than past tax hikes, perhaps the final vote will have a surprise ending.
- https://fivethirtyeight.com/features/the-gop-tax-cuts-are-even-more-unpopular-than-past-tax-hikes/
- http://www.taxpolicycenter.org/publications/distributional-analysis-tax-cuts-and-jobs-act-passed-senate/full
- https://www.jct.gov/publications.html?func=startdown&id=5045
- https://www.nytimes.com/interactive/2017/12/15/us/politics/final-republican-tax-bill-cuts.html?_r=0
