Limited Or No Wage Impact
Corporate executives indicated that raising wages and investment were not priorities should they have additional funds due to a tax cut. A survey conducted by Bank of America-Merrill Lynch of 300 executives of major U.S. corporations asked what they would do with a corporate tax cut. The top three responses were that they would pay down debt, conduct stock buybacks, and conduct mergers. An informal survey of CEOs by Trump advisor Gary Cohn resulted in a similar response, with few hands raised in response to his request for them to do so if their company would invest more.
Former Clinton cabinet Treasury Secretary Larry Summers referred to the analysis provided by the Trump administration of its tax proposal as “…some combination of dishonest, incompetent, and absurd.” Summers wrote that the Trump administration’s “central claim that cutting the corporate tax rate from 35 percent to 20 percent would raise wages by $4,000 per worker” lacked peer-reviewed support and was “absurd on its face.”
A Change In Priorities
This increase in the federal debt means that formerly budget-conscious Republicans in Congress have done an about-face on fiscal policy.
For example, in 2011, Republicans supported the Budget Control Act, which automatically cut spending across the board between 2013 and 2021. These mandatory spending cuts were called “sequestration.”
In 2013, Republicans threatened to not raise the debt ceiling to force budget cuts. That would have forced the U.S. to default on its debt. Fortunately, better-than-expected revenue meant that the debt ceiling debate was postponed until the fall.
In these instances, congressional Republicans were focused on limiting debt and deficit growth at the expense of government functioning. However, with the TCJA, Congress passed a law that significantly increased both deficit spending and the federal debt.
Growth And Budget Impacts
Treasury Secretary Steven Mnuchin claimed that the Republican tax plan would spur sufficient economic growth to pay for itself and more, saying of the “Unified Framework” released by Senate, House and Trump administration negotiators in Sept. 2017:
“On a static basis our plan will increase the deficit by a trillion and a half. Having said that, you have to look at the economic impact. There’s 500 billion that’s the difference between policy and baseline that takes it down to a trillion dollars, and there’s two trillion dollars of growth. So with our plan we actually pay down the deficit by a trillion dollars and we think that’s very fiscally responsible.”
The idea that cutting taxes boosts growth to the extent that government revenue actually increases is almost universally rejected by economists, and for a long time, the Treasury did not release the analysis Mnuchin bases his predictions on. The New York Times reported on Nov. 30, 2017, that a Treasury employee, speaking anonymously, said no such analysis exists, prompting a request from Sen. Elizabeth Warren that the Treasury’s inspector general investigate.
On Dec. 11, 2017, the Treasury released a one-page analysis claiming that the law will increase revenues by $1.8 trillion over 10 years, more than paying for itself, based on high growth projections:
- 2.5% real GDP growth in 2018
- 2.8% in 2019
- 3.0% for the following eight years
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How Itemized Deductions Changed
If taxpayers incur certain types of expenses, they can deduct the expenses on their federal taxes. These are called itemized expenses and you take them â as itemized deductions â instead of taking the standard deduction. That means your itemized deductions need to be worth more than your standard deduction to be worth claiming.
The TCJA made multiple changes to itemized deductions, like putting a $10,000 limit on the state and local tax deduction and eliminating a number of miscellaneous deductions. The new, higher standard deduction also means fewer taxpayers are able to itemize, because they need to have about twice as much in itemized deductions in to make itemizing worth it.
The latest IRS data shows that 30.9% of taxpayers itemized deductions in 2017, but only 11.3% itemized in 2018 88.4% of taxpayers took the standard deduction in 2018.
Taxpayers claimed the following types of itemized deductions about 60% less in 2018:
The medical expenses deduction was claimed 57.2% less in 2018 than 2017
The mortgage interest deduction was claimed 60.9% less in 2018 than 2017
The charitable contributions deduction was claimed 63.5% less in 2018 than 2017
The deduction for total taxes paid, which includes the SALT deduction, was claimed 64.5% less in 2018 than 2017
Promise: A Simpler Tax Code
Some aspects of the law did make filing tax returns easier.
For individuals, the law boosted the standard deduction, which allowed millions of people to skip itemizing on their annual tax returns. It also raised the threshold for a parallel system of taxation meant to target people who take an outsize amount of credits and deductions, known as the alternative minimum tax, and eliminated a similar system for corporations.
But other changes to the tax codesuch as a 20% write-off for owners of pass-through businesses, and the laws byzantine international provisionswere far from simple, even before the IRS wrote hundreds of pages of regulations for how to follow them.
Beyond the code, Republicans promised that people would be able to do their taxes on a postcard-sized form.
That was somewhat true in 2018, when the IRS shrunk the Form 1040 from two full pages to a small one-page document. However, for that year, lines for reporting income, credits, and deductions were shifted to six separate attached schedules.
Then, in 2019, the IRS reverted to a two-page 1040 form, and the agency reduced the number of schedules to threesomewhat placating accountants who complained that the previous years postcard was a mess.
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Some Taxpayers Missed Personal Exemptions
In 2017, each taxpayer could also claim a personal exemption worth $4,050 for themselves and for each dependent. This exemption lowered their taxable income because, along with the $6,350 standard deduction, a single filer with no kids would effectively deduct $10,400. This isnât much lower than the new standard deduction and for certain taxpayers it wouldnât result in much tax savings.
Example: Letâs say a single parent has two children and qualifies as a head of household. In 2018, this parent would have gotten a standard deduction of $18,000 and their taxable income would be lowered by that amount. This is up from the head of household standard deduction of $9,350 in 2017, the last year before the tax reform took effect.
But in 2017, this parent would have been able to claim not only the standard deduction of $9,350 but also three personal exemptions worth a total of $12,150 , allowing them to lower their taxable income by $21,500. The result of the Trump tax reform is that, for this household, the new standard deduction is worth less than the combined value of the standard deduction and personal exemptions in 2017. The change could leave this single parent owing more in taxes.
Why Dont People Believe It
The tax savings were relatively small for many families, however. The middle fifth of earners got about a $780 tax cut last year on average, according to the Tax Policy Center.
Most Americans would probably welcome a $780 windfall. But in contrast to 2001, when President George W. Bushs Treasury Department mailed rebate checks to taxpayers, last years tax cuts showed up mostly in the form of lower withholding from workers paychecks. A few extra dollars in a biweekly paycheck proved easy to miss. Moreover, as taxpayers filed their returns, many found they were due smaller refunds than in the past, which may have further skewed perceptions of the law.
Most people didnt recognize the increase in take-home pay, or at least didnt attribute it to the tax cut, Mr. Rigney said. Some of them might realize it now that theyre filing their taxes, he said, but its little consolation to discover that you received a couple thousand dollars during the year but you already spent it.
High earners did far better under the law. The top 20 percent of earners received more than 60 percent of the total tax savings, according to the Tax Policy Center the top 1 percent received nearly 17 percent of the total benefit, and got an average tax cut of more than $30,000. And thats not even factoring in the laws huge cut to corporate taxes, which disproportionately benefit the wealthy households that own the most stock.
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Millions Of Americans Seeing Shrinking Refunds Under Trump Tax Plan
Under the new law, a company’s income is only taxed in the country in which it is earned. The U.S. no longer taxes new foreign profits unless they reach a certain threshold, at which point the income is taxed at 10.5 percent, half that of the U.S. effective rate.
Take for example the giant technology hardware and services company IBM Corp., which consistently ranks among the biggest U.S. companies. The company had revenues of $79.6 billion, more than 60 percent of which came from outside the United States. To that end, IBM made a $2 billion tax payment on future foreign profits in 2018, according to its financial filings. Tax advisor Willens noted IBM elected to make the $2 billion tax payment on future overseas earnings in 2018 instead of down the road in the period it occurs as many companies will do.
Meantime, in the United States, IBM reported getting a federal refund of $342 million on its U.S. income before taxes of $500 million, according to ITEP and the company’s annual filing. That computes to an effective U.S. tax rate of negative 68 percent. Its worldwide profits were $8.7 billion â and its total tax provision was $2.6 billion including the foreign tax payment.
IBM did not return requests for comment. On a January conference call with investors, IBM Chief Financial Officer Jim Kavanaugh said it anticipated “an all-in rate of at least 11 percent to 12 percent” in 2019, but he did not elaborate.
Gop Real Estate Owners Make Out Big
Besides the laws benefits to real estate pass-throughs, real estate in general was hugely favored by the tax law, allowing property exchanges to avoid taxation, the deduction of new capital expenses in just one year versus longer depreciation schedules, and an exemption from limits on interest deductions.
If you are a real estate developer, you never pay tax, said Ed Kleinbard, a former head of Congresss Joint Committee on Taxation.
Members of Congress own a lot of real estate. Public Integritys review of financial disclosures found that 29 of the 47 GOP members of the committees responsible for the tax bill hold interests in real estate, including small rental businesses, LLCs, and massive real estate investment trusts , which pay dividends to investors. The tax bill allows REIT investors to deduct 20 percent from their dividends for tax purposes.
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Trump Versus Bush And Obama Tax Cuts
The biggest difference between the Trump and Bush or Obama tax cuts is the timing. The Trump tax cut occurred while the economy was solidly in the expansion phase of the business cycle.
The Bush tax cuts occurred during the 2001 recession and the years immediately following. Congress was concerned that the recession would worsen without the cuts.
President Obama cut taxes in the 2009 economic stimulus package. Between that and the government spending, the recession ended that same year The 2010 Obama cuts occurred only two years after the 2008 financial crisis.
The Bush, Obama, and Trump tax cuts increased the deficit and debt.
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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Corporate Income Taxes Were Way Down In 2018
One of the biggest results of Trumpâs tax cuts was lowering the corporate income tax rate to 21% from 35%. This change appears to have benefited businesses greatly, because the corporate income tax payments collected by the IRS decreased by 22.4% from 2018 than 2017.
Looking just at year-over-year returns, businesses enjoyed an increase of 33.8% in tax refunds nationally from 2017 to 2018. The average business income refund varied by state, but businesses in some states appear to have received a major windfall. In Maryland, for example, businesses received total refunds worth 238.6% more .
The tax savings that businesses received from President Trumpâs tax plan could offset the benefits of the tax reform to workers. The lower corporate tax rate is also a permanent change to the U.S. tax code, but the lower tax rates for individuals are temporary and will expire in 2025. That means workers could receive a tax increase in five years even as businesses continue to pay a lower rate.
Promise: A Level Playing Field
A businesss tax rate depends on, among other things, its structure.
Most businesses are structured as pass-through or flow-through entities, with the owners facing individual tax rates and no tax on the entities themselves.
On the surface, dropping the corporate tax rate to 21% from 35% while only lowering the top individual rate to 37% from 39.6% might seem unfair. So the law includes a special deduction for pass-through owners, allowing them to shield up to 20% of their income from those businesses from individual taxes.
But it isnt as simple as comparing the corporate and individual tax rates.
After a C corporations profits are taxed at the corporate rate, the remaining profits that go to shareholders get taxed at the capital gains rate, too. Depending on how much profit is doled out to those shareholders, the total rate on corporate profits could be well above the individual tax rates pass-through owners faced prior to the tax code overhaul. Thats still the case, albeit to a lesser extent, with that 20% deduction.
Just in terms of fairness, the pass-throughs still have an advantage, said Richard Prisinzano, director of policy analysis at the Penn Wharton Budget Model. Its just been diminished.
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