It is significant to note that the proposed “Tax Cuts and Jobs Act” is not actually a “tax cut,” as has been widely and erroneously reported. The term “tax cut” implies that everyone will benefit from a tax reduction. Even President Trump has stated that the proposed tax bill is designed to be “revenue neutral.” In point of fact, in accordance with the 1985 Byrd Rule, in order for the bill to be approved by the Senate by a simple majority, it must project to raise the deficit by no more than $1.5 trillion over the next ten years. Otherwise, 6o votes would be needed to pass the Senate, and no one thinks that will happen.
Thus, any tax bill that is passed will have winners and losers. Obviously, everyone wants to be a winner, and no one wants to be a loser. The bill has something for everyone – both to like and to hate. Given the difficulty of getting Congress to agree on anything, it faces an extreme uphill battle.
The essential elements of the bill are delineated below. Depending on your economic situation, family structure, and geographic location you will like some and hate others.
- The number of tax brackets will be reduced from seven to four. The lowest bracket will be increased from 10% to 12%.
- The standard deduction will be increased. For example, for a married couple filing jointly it will jump from $12,700 to $24,000. Thus, such a family unit would not pay any taxes on the first $24,000 of income. Sounds great, but the personal exemptions of $4,050 per person would be eliminated, which would mitigate, or in large families offset, this benefit. Lower income families with many children and/or elderly or blind members could even face an increased tax burden.
- The current rules regarding 401Ks and IRAs would not be changed.
- The child care credit ceiling would be increased from $1,000 to $6,000, and an additional $300 credit would be added for non-child care, such as for parents.
- The alternative minimum tax would be repealed. In my opinion, this provision is the “king of ‘unintended consequences.’ ” When it was enacted in the 1960s it was intended to apply only to the very rich who had employed a variety of tools to avoid taxes. However, it was not indexed to inflation. So, over the years it has ensnared many middle income taxpayers as well.
- Mortgage interest will be reduced to $500,000 for new homes.
- The deduction for property taxes would be limited to $10,000.
- The deduction for state and local taxes would be eliminated. These last two may doom the bill since no Congressman from NY, California, or any other highly taxed state could afford to vote for them, politically. That, folks, is a lot of “nay” votes.
- Repeals the estate tax. Although this action will help many small business owners and farmers, it has been widely perceived as a major benefit for the wealthy, and it is one of the more controversial provisions of the bill.
- Reduces the rate on small and family-owned business profits (sole proprietorships, partnerships and subchapter S corporations, from a high of 39.5% to 25%.
- Provides for repatriation of profits being maintained overseas at a rate of 20%.
In my opinion, the bill is doomed to failure in its present form for the following reasons:
- Although tax cuts are always popular, it is not a tax cut per se.
- It is perceived, by many, as too beneficial to the rich.
- Its primary claim, that it will spur economic growth over the next several years, is disputed, open to interpretation, and is more than offset by the deficiencies stated above.
- It contains three very toxic provisions – elimination of state and local taxes and estate taxes and reduction of the mortgage interest deduction.
- Few, if any Dems will vote for it, and none from the populous, highly-taxed states, such as NY, NJ, CA, and MA.
- In order to pass, the bill needs the support of every Republican. Unfortunately, some conservative GOP Congressmen, such as Senator Bob Corker, have already stated they adamantly oppose it because they feel it will add to the deficit.
- Perhaps, most telling, is that neither President Trump nor his key legislative advisors and leaders, such as Messrs. Pence, Ryan and McConnell, have demonstrated an ability to finesse legislation through a contentious and antagonistic Congress. Therefore, the chances of them being successful with this bill are slim.
Despite the foregoing, I believe that the bill is salvageable, but it will take a lot of work. I am in favor of tax reform, but not this bill in its present form.
This will be an excellent opportunity for President Trump to show off his vaunted negotiating skills. His presidency needs a legislative win badly. Lets see if he can pull it off.
Your assessment of element 9 (and I’ve heard it elsewhere) confuses me. “Repeals the estate tax. . . . this action will help many small business owners and farmers,” Are there many, or any, small businesses or farms that currently exceed the $5.49 million exemption?
Thank you for your comment. Supposedly, some, but not too many, which is why I said that the perception is that it is a windfall for the rich. There is also a philosophical argument that this wealth has already been taxed. Another factor is that truly wealthy people are very skilled at avoiding estate taxes through various legal means, e.g trusts, gifts, etc. Supporters of the bill might be better served to sacrifice it in the final draft.
Best to Rick.