Us Tax Cuts: Are They The Biggest In American History
Claim: President Donald Trump has said that the recently passed Republican tax reform legislation is the “biggest tax cut in US history”.
Verdict: It is not the biggest tax cut in US history, measured as either a percentage of US GDP or in absolute terms. It is however, the biggest corporate tax cut in US history.
It’s tax day in America – something most Americans dread.
But this year, the filing of both personal and corporate taxes has become even more complicated due to the recently passed tax reform bill in the United States.
President Donald Trump touted the legislation in a speech on 16 April in Hialeah, Florida, saying: “We have the biggest tax cut in history, bigger than the Reagan tax cut. Bigger than any tax cut.”
But while most Americans are filing for 2017 and so won’t feel the biggest impact until next year – is the claim true?
Winners: High Earners Who Formerly Paid The Amt
Under the old law, taxpayers with higher incomes were subject to something known as the alternative minimum tax.
These filers would calculate their income tax liability twice: once under the ordinary rules and again with the AMT, which would bar you from claiming certain write-offs and itemized deductions.
You would then look at your liabilities under the ordinary rules and the AMT and pay whichever tax was the highest.
The number of people who think they’re worse off versus those who are actually worse off is driven by this perception of whether the refund went up or down.Ed ZollarsCPA at Thomas Zollars & Lynch
The Tax Cuts and Jobs Act raised the 2018 AMT exemption to $109,400 for married taxpayers, from $84,500. For single filers, the exemption rose to $70,300, from $54,300.
The AMT tweak is forecast to reduce the number of people paying the AMT to 200,000 per year through 2025 which is when this change will expire compared to 5 million in 2017, prior to the tax overhaul, the Tax Policy Center found.
“Under today’s laws, it’s highly unlikely you’ll be in the AMT, said Jeffrey Levine, CPA and CEO of BluePrint Wealth Alliance in Garden City, New York.
Personal Exemption And Healthcare Mandate
The law suspended the personal exemption, which was $4,150, through 2025. The law also ended the individual mandate, a provision of the Affordable Care Act or “Obamacare” that provided tax penalties for individuals who did not obtain health insurance coverage, in 2019. the taxpayer will still be exposed to a penalty for not being covered by health insurance all year.)
According to the Congressional Budget Office , repealing the measure is likely to reduce federal deficits by around $338 billion from 2018 to 2027, but lead 13 million more people to live without insurance at the end of that period, pushing premiums up by an average of around 10%. Unlike other individual tax changes, the repeal will not be reversed in 2025.
Senators Lamar Alexander and Patty Murray proposed a bill, the Bipartisan Health Care Stabilization Act, on Mar. 19, 2018, to mitigate the effects of repealing the individual mandate. The CBO estimated that this legislation would still leave 13 million more people uninsured after a decade. The bill failed to make it into the $1.3 trillion spending bill that was passed on Mar. 23, 2018. As such, the burden of providing affordable health insurance will be on states and health insurers.
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The Trump Administration Claimed Its Corporate Tax Cuts Would Translate Into A $4000 Raise For The Average Household
In selling the large corporate tax cut to Congress and a skeptical American public, the Trump administration claimed that corporate tax cuts would ultimately translate into higher wages for workers. The tax cuts would trickle down to workers through a multistep process. First, slashing the corporate tax rate would increase corporations after-tax returns on investment, inducing them to massively boost spending on investments such as factories, equipment, and research and development. This investment boom would give the average worker more and better capital to work with, substantially increasing the overall productivity of U.S. workers. In other words, they would be able to produce more goods and services with every hour worked. And finally, U.S. workers would capture the benefits of their increased productivity by successfully bargaining for higher wages.
Trumps Tax Cut One Year Later: What Happened
Many corporations made good on promises to raise wages and pay bonuses. But others announced layoffs, even as the $1.5 trillion tax cut added billions to their bottom lines.
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There was a point in early 2018 when big American companies couldnt stop talking about the Trump tax cuts. Flush with the projected savings from a $1.5 trillion law, they promised to raise wages, hand out bonuses to workers and invest in big projects. They scored headlines, along with applause from President Trump.
The fawning faded quickly. Analysts noted that the handouts to workers amounted to a relatively small share of the roughly $200 billion in federal income taxes that corporations avoided thanks to the cuts. Wages across the economy ticked up, but not by nearly as much as some Republicans had promised when they voted for the law. Capital investment surged at the start of the year, but the rate of growth fell sharply in the third quarter.
Stock buybacks by publicly traded companies continue to set records. They neared $200 billion in the third quarter for S& P 500 companies. Goldman Sachs analysts have predicted that the total amount of buybacks across the economy could top $1 trillion for the full year.
Heres a look at what companies promised and what has come to pass as we head into Year Two of the Tax Cuts and Jobs Act.
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The Promised Boom In Business Investment Never Happened
In the year following the tax cut, business investment increasedbut not by nearly as much as the tax cut proponents predictions would have implied. Furthermore, a study by the International Monetary Fund concluded that the relatively healthy business investment in 2018 was driven by strong aggregate demand in the economynot the supply-side factors that tax cut proponents used to justify the tax cut. In other words, the increase in business investment from the relatively weak 2015-2016 period seems like another example of an economic indicator returning to more-normal levels.
Worse, business investment has slowed more recently. The most recent data show that private nonresidential investment actually declined in the second quarter of 2019, contributing to an overall slowdown in growth. Federal Reserve Chairman Jay Powell pointed to the continued softness expected in business investment and declining output in manufacturing sector as reasons for the Feds recent rate cut. Measures of the investments that companies are planning have also . As analysts at the nonpartisan Tax Policy Center wrote recently, This slowdown in business purchases of plant and equipment contrasts sharply with President Trumps rosy forecast of a long-term investment boom that would lead to annual wage increases of $4,000 or more. Moreover, investment in housing has declined every quarter since the passage of the tax legislation.
Trumps Corporate Tax Cut Is Not Trickling Down
Business investment is slowing, despite lofty promises, and worker bonuses were a mirage.
- Seth Hanlon
- Michael Madowitz
Two years ago, President Donald Trump and Republicans in Congress cut the corporate tax rate from 35 percent to 21 percent via the Tax Cuts and Jobs Act of 2017 . At the time, the Trump administration claimed that its corporate tax cuts would increase the average household income in the United States by $4,000. But two years later, there is little indication that the tax cut is even beginning to trickle down in the ways its proponents claimed.
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What Does The Composition Of The Revenue Shortfalls Tell Us About The Effect Of The Tcja
The TCJAs changes mostly affected the corporate and individual income taxes . The act reduced the top corporate tax rate from 35% to 21%a 40% reduction. Actual corporate income tax revenue in FY2018 was $135 billion lower than CBOs projection from 2017almost exactly a 40% decline. The most recent CBO projections estimate further decreases in corporate tax revenue. The TCJA also reduced income taxes for most Americans, which led to a decline in revenues relative to prior projections. For individual income taxes, actual collections in FY2018 were $97 billion, or 5.4%, below pre-TCJA projections.
These effects are accentuated if one looks at taxes as a share of GDP . In 2017, before the tax cuts were considered, the CBO estimated that total revenues would be 18.1% of GDP in FY2018. With the TCJA, revenues were only 16.4% of GDP. Similar patterns hold for individual income taxes and for corporate income taxes. Due to data limitations, the revenue numbers in Table 1 are on a fiscal year basis. As a result, 2018 data include the three months prior to the acts enactment. If the values were instead on a calendar year basis so that 2018 only included post-TCJA revenues, the revenue declines would be even larger.
Changes To The Tax Code
President Trump signed the Tax Cuts and Jobs Act into law on Dec. 22, 2017, bringing sweeping changes to the tax code. How people felt in principle about the $1.5+ trillion overhauls depended to some extent on their opinion of Trump’s presidency. Individually, the impact of the changes depended on factors like income level, filing status, and deductions. Those living in a high-tax state with soaring property values may have paid more in taxes in 2019.
For the wealthy, banks, and other corporations, the tax reform package was considered a lopsided victory given its significant and permanent tax cuts to corporate profits, investment income, estate tax, and more. Financial services companies stood to see huge gains based on the new, lower corporate rate , as well as the more preferable tax treatment of pass-through companies. Some banks said their effective tax rate would drop under 21%.
Given the popular criticism of the tax overhaul’s disparities, coupled with GOP losses in the 2018 midterm elections, as well Trump’s potential trade war muting the benefits of the tax cuts for voters, there were discussions surrounding tax reforms. The reforms could make individual tax cuts permanent and encourage retirement savings and business innovation. More on that later.
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Mandatory Spending Outstrips Investment In The Future
Mandatory and investment spending as a percentage of total U.S. government spending from 1970 to 2019. Mandatory spending includes programs such as Social Security and Medicare, while investment includes infrastructure, research and development, education and training.
Spending more and more on past promises and shrinking the proportion of spending for the future doesnt bode well for our kids and grandkids. Had Trump done what he said hed do and paid off part of the national debt before COVID-19 struck rather than adding significantly to the debt, the situation would be considerably less dire. And had Trump done a better job of coping with COVID-19, the economic and human costs wouldve been greatly reduced.
In addition to forcing us to reduce the proportion of the budget spent on the future to help pay for the past, theres a second reason that huge and growing budget deficits matter: interest costs.
Bigger debt ultimately means bigger interest costs, even in an era when the Federal Reserve has forced down Treasury rates to ultralow levels. The governments interest cost was around $523 billion in the 2020 fiscal year. That outstrips all spending on education, employment training, research and social services, Treasury data shows.
Differences Between The House And Senate Bills
There were important differences between the House and Senate versions of the bills, due in part to the Senate reconciliation rules, which required that the bill impact the deficit by less than $1.5 trillion over ten years and have minimal deficit impact thereafter. For example:
In final changes prior to approval of the Senate bill on December 2, additional changes were made that were reconciled with the House bill in a conference committee, prior to providing a final bill to the President for signature. The Conference Committee version was published on December 15, 2017. It had relatively minor differences compared to the Senate bill. Individual and pass-through tax cuts expire after ten years, while the corporate tax changes are permanent.
In the Senate, Republicans “eager for a major legislative achievement after the Affordable Care Act debacle … have generally been enthusiastic about the tax overhaul.”
A number of Republican senators who initially expressed trepidation over the bill, including Ron Johnson of Wisconsin, Susan Collins of Maine, and Steve Daines of Montana, ultimately voted for the Senate bill.
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Did Repealing Obamacares Individual Mandate Help
From 2014 to 2017, the Affordable Care Act required Americans to pay a penalty on their taxes if they did not have qualifying health insurance coverage during the year. This penalty was officially called the Individual Shared Responsibility Payment but was usually referred to as the individual mandate.
President Trumps tax plan repealed the individual mandate starting in 2018. The repeal of Obamacares individual mandate saved taxpayers $3.7 million in taxes. The penalty affected 4.7 million taxpayers in 2017 primarily for taxpayers with adjusted gross income between $5,000 and $15,000 and it cost an average of $788 per taxpayer. Presumably, repealing the individual mandate saved people hundreds of dollars on their taxes.
However, these tax savings need to be taken in context. Going without health insurance can leave you with big medical bills if you get sick and can end up costing you more overall. This may have happened in 2018. U.S. Census Bureau data shows that fewer Americans had health insurance coverage in 2018 than 2017, while data from the U.S. Bureau of Labor Statistics also shows that health care spending increased for 60% of Americans from 2017 to 2018. Average spending on health care rose by 3.2%, while health insurance spending decreased by 0.3%, on average.
In other words, Americans spent more on health care after the individual mandate was repealed. Whether these expenses exceeded the savings from the repeal remains to be seen in future federal data.
Many Large Profitable Corporations Are Paying No Tax
Researchers at the Institute on Taxation and Economic Policy surveyed corporate financial reports for the first year that the TCJA was in effect and recently published their findings. Examining 379 profitable Fortune 500 companies, they found that the companies paid an average effective tax rate of just 11.3 percent on their U.S. income in 2018slightly more than half of the 21.2 percent average effective rate that large corporations paid from 2008 to 2015. Shockingly, ITEP found that 91, or nearly one-quarter, of these major corporations paid no federal income tax on their U.S. income in 2018.
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