GOP’s Final Tax Package: What’s In What’s Out, What Are The Impacts?
The House Senate Conferees have cooked the final product, and it is ready to be voted on next week. Some important deductions survived, but over-all the package increases the deficit and further tilts/rigs the economy towards the highest income individuals. This is an important opportunity squandered, and the big GOP donors were amply rewarded.
The tax bill cuts federal revenues by $1.5 trillion over the next decade. JCT and CBO estimate that at best, this would stimulate economic growth by $500 billion, leaving an increase in the federal debt of $1 trillion.
At a time when the economy is perking along quite well with low unemployment and low inflation, the economists concur that this could increase inflation rather than stimulate growth. The economists typically recommend cutting taxes during recessions to stimulate the economy while increasing them during periods of strong growth to reduce the deficit. An increasing federal budget deficit will require an increase in federal interest payments, a particularly unproductive use of taxpayer’s money. The contents of the bill will worsen income inequality as the contents of reform has been steadily tilted to reward the highest income American tax payers. Over time, the bill provides for a steady transfer of wealth from low, moderate and middle income taxpayers to the extremely wealthy and to the most profitable corporations in America. All this is done under the guise of a tax cut for the middle class that turns out to be temporary in nature.
The latest details on the proposal are that the top corporate tax rates would be cut from 35% to 21% a cost of about $1 trillion. The top individual tax rates would be cut from 39.6% to 37%. In addition, the threshold for paying the top marginal tax rates would be increased to $500,000 for individuals and $600,000 for married couples filing jointly. Corporate tax reductions are permanent; whereas individual tax reductions expire in 2025.
The deduction for state and local property and income taxes would be capped at $10,000. In California, a state with high property values and a very progressive personal income tax, this is going to hurt a number of upper middle-income workers and homeowners in the Bay Area, Orange, Los Angeles, San Diego, Ventura and Santa Barbara counties quite badly. Residents of other states with high property values and high state and local taxes, like New Jersey, New York and Connecticut, will be hurt as well. Taxpayers in states with no state income tax like Texas or Florida will be far less impacted, if at all.
The deduction for home mortgage interest is capped at $750,000; this is a reduction from $1 million and a compromise between the House at $500,000 and the Senate at $1 million. This is going to hurt middle and upper middle-income homebuyers in the Bay Area, Orange, Los Angeles, San Diego, Ventura and Santa Barbara. It is also likely to reduce property values somewhat as prospective homeowners will be less able to write off their mortgage interest. The GOP tax writers believe that this deduction inflates home prices unreasonably and the cap will actually improve housing affordability. We will see whether this conjecture is proven.
The child tax credit is increased from $1,000 to $2,000, and families with incomes up to $400,000 will be able to claim the credit. For low-income families, it will now be refundable up to $1400, thanks to the efforts of Senator Rubio.
The standard deduction will double so that fewer taxpayers will itemize their deductions, making tax filing far simpler.
The tax on individuals who fail to purchase or enroll in some form of health insurance is reduced to zero effective in 2019. The CBO projects this will add 10% to the cost of individual health insurance premiums as the market may have fewer healthy enrollees. This repeal is not effective this coming year (2018), but will be effective in 2019, implying that the conferees recognize that they must do more to prevent the exit and assure enrollment of the healthiest Americans.
Pass through companies such as SubChapter S Corporations (read the Trump Organization) will be able to deduct 20% of their income tax free. It is projected that this may lead an avalanche of high-income earners to create their own pass though entities to shelter their incomes and pay taxes at lower rates.
The threshold for application of the alternative minimum tax (AMT) will be increased. Again, read here President Trump who was entrapped by the AMT on his 2005 taxes.
The exemption from the federal estate tax will be increased from $5.5 million to $11 million for an individual and $11 million to $22 million for a couple. The Trump children thank the GOP for this holiday gift.
The medical expense deduction, the student loan deduction, and the graduate student tuition exemption, which would have been repealed in the House bill, remain intact in the final version.
There is no analysis by either the CBO or the JCT of the impacts of the bill, but the Republican lawmakers appear to be unwilling to wait for the traditional legisaltive analyses before they pass their Christmas gift to their wealthy donors.
Prepared by: Lucien Wulsin
Dated: 12/16/17