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The Tax Cuts and Jobs Act of 2017, like all new laws, comes with good and bad elements. As always, some will benefit more than others, but only time will tell exactly how much the bill helps or harms the people of the United States.

One of the goals was to simplify the tax code. While it is still very complicated and has special rules for specified service businesses such as accounting, law, and financial services, there are some movements toward simplification. As seen at the non-profit independent Tax Foundation (2017), there are seven income tax brackets and rates for 2017. Income requirements for each of these tax brackets is different for single,

No Such Thing as Perfect Elizabeth Keavney, Ph.D. Professor at American Public University System Published Jan 2, 2018

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married filing joint, and head of household filers. Additionally, there will be an increased tax credit for families with children.

Once the bill becomes law, there will be reduced tax rates for most of the tax brackets except for one of the top brackets. The standard deduction has been increased to make up for the elimination of many of the deductions that were in the old tax code. Personal exemptions were repealed.

The bill will tend to help families with children and tend to harm those who live in states with high state and local taxes and states that have a high cost of housing.

The act will allow individuals to deduct a maximum of $10,000 in state and local income taxes or property taxes. (Nevius, 2017) This impacts those who live in states with higher state income taxes such as California (13.3%), Oregon (9.9%) and Minnesota (9.86%). (Turbotax, 2017) According to Tax Foundation as cited by Robertson, “Just six states (California, New York, New Jersey, Texas, Illinois, and Florida) claim more than 50 percent of the property tax deduction.”

Additionally, the new code retains the deduction for charities. The interest on home mortgages is deductible for mortgages up to $750,000 for new mortgages. Mortgages that were under contract before December 15, 2017 are still allowed to deduct interest for mortgages up to the prior limit of $1 million. Those people in areas where homes are most expensive who purchase new homes after November 2, 2017, will be harmed the most by this.

Another aspect of the act is that people will no longer be required to purchase the health insurance that the government decides they should have but will be allowed to purchase the health insurance they think is best for them. This does not mean they will lose insurance, though they may decide not to have insurance if they prefer.

While some criticize the bill because personal tax reductions are scheduled to expire, it is important to remember that this is not a Constitutional Amendment, it is a law that can be changed by any future U.S. Congress long before the reductions expire.

Figures 1 and 2 show the federal income tax rates (percent of taxable income due to the federal government) under the tax rates effective in 2017 and 2018. Note that they do not capture the reduction in taxable income for those who do not itemize deductions (or whose itemized deductions plus personal exemptions would be less than the new standard deduction) caused by the increased standard deductions or the

increase in taxable income for those who are negatively affected by the elimination of or limits on some deductions. The former will benefit taxpayers who do not itemize (a majority do not), and the latter is likely to mainly reduce the tax benefits for people with high incomes and people who live in states with high income taxes.

Figure 1. Federal income tax rate comparison for unmarried filers. Information is from Tax Foundation (2016) and U. S. Congress (2017)

Figure 2. Federal income tax rate comparison for unmarried filers. Information is from Tax Foundation (2016) and U. S. Congress (2017)

As is evident from the figures, the people who pay very low taxes get relatively little benefit from rate reduction. The increased standard deduction will provide a greater benefit to these people in percentage terms. The greatest reductions in taxes (in percentage terms) occur below $50,000 taxable income for single filers and below $100,000 for joint filers. Of course, the greatest reductions in absolute dollars will be

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for those with very high incomes, since they are paying higher tax percentages and much higher taxes in absolute dollars than those with lower incomes are.

The lower business tax rate has already begun to have an impact. According to National Review (2017), a number of companies have separately decided to invest in the U.S. and share money they saved due to the Tax Cuts and Jobs Act. Fifth-Third Bancorp will raise hourly wages and pay one-time bonuses as soon as the bill is signed into law. AT&T is giving employee bonuses and making a $1 billion investment in the United States. Boeing will invest in “employee-related and charitable investments. Comcast-NBC Universal will award bonuses and invest in infrastructure. Wells Fargo will match Fifth-Thirds wage increase and make philharmonic donations of up to $400 million. Similarly, Target will raise hourly wages to $11 per hour and later to $15 per hour over a period of two years (Business Wire (2017). In each of these examples, the company explicitly stated that its action was the result of the Tax Cuts and Jobs Act.

So, when the various special interest groups were done influencing Congress, the final bill did not simplify the tax code as much as it might have (for example, by reducing the number of brackets) and did not make the sweeping reforms promised. Those taxpayers who previously did not itemize (70%, according to FactCheck, 2017) will have lower federal income taxes due to the increase in standard deductions and lower tax rates. Those taxpayers who did not itemize and have children will have lower federal income taxes for those reasons and the tax credit for children that was doubled. People who live in high-tax states where homes cost more may or may not have lower federal income taxes.  

Some speculated that President Trump might not sign the bill until January 2018, following the strategy used by President Obama when the Affordable Care Act was signed later to delay the increases in the cost of health insurance until after elections. This would have avoided any spending cuts required by the Paygo (pay-as-you-go) budget law. However, President Trump signed the bill into law December 22, 2017, saying that he’d promised to do so before Christmas if Congress passed the bill before Christmas.

Though the act did not achieve all of its stated goals, it will reduce income taxes for a majority of taxpayers and its corporate tax rate reduction appears to be causing companies to raise wages and increase investment in the U.S. These increases will benefit the economy. Whether the increased revenue will make up for the decrease in

taxes has yet to be seen. However, since total federal receipts generally falls between 15% and 20% of the National GDP (Gross Domestic Product), increasing the GDP should help increase the income for the federal government. (Tax Policy Center, n.d.)

 

 

 

 

Resources

Business Wire. (2017). Target raises minimum hourly wage to $11, commits to $15 minimum hourly wage by end of 2020. Retrieved December 21, 2017, from https://www.businesswire.com/news/home/20170925005691/en/Target-Raises- Minimum-Hourly-Wage-11-Commits

CBS News (December 20,02017) No tax cuts for Christmas? Trump might delay bill signing. Retrieved December 21, 2017, from https://www.cbsnews.com/news/no-tax- cuts-for-christmas-trump-might-delay-bill-signing/

Devoe, P. (December 20, 2017). Thanks for the tax-reform bill. National Review. Retrieved December 21, 2017, from http://www.nationalreview.com/corner/454814/att-boeing-tax-reform-plans- companies-use-money-saved-bonuses-investment

intuit turbotax. (2017). States with the highest and lowest taxes. Retrieved December 21, 2017, from https://turbotax.intuit.com/tax-tips/fun-facts/states-with-the-highest- and-lowest-taxes/L6HPAVqSF

Nevius, A. M. (December 20, 2017) What the tax reform bill means for individuals. Journal of Accountancy. Retrieved December 21, 2017 from https://www.journalofaccountancy.com/news/2017/dec/tax-reform-bill-changes-for- individuals-201718070.html

Pomerleau, K. (November 10, 2016). 2017 tax brackets. Tax Foundation. https://taxfoundation.org/2017-tax-brackets

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Robertson, L. (November 10, 2017). The facts on the SALT deduction. FactCheck.org. Retrieved December 21, 2017 from https://www.factcheck.org/2017/11/facts-salt- deduction/

Tax Foundation (2016). 2017 Tax Brackets. Retrieved from https://taxfoundation.org/2017-tax-brackets

Tax Policy Center, Brookings Institute. (n.d.). Briefing book. Retrieved December 22, 2017, from http://www.taxpolicycenter.org/briefing-book/what-are-sources-revenue- federal-government

U.S. Congress (2017). An act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018. Retrieved from https://www.govtrack.us/congress/bills/115/hr1/text

 

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