Republicans, still smarting from another failed Obamacare repeal, hope tax reform will give them a victory ahead of the 2018 midterm elections.
After months of closed-door negotiations, the White House and congressional Republicans released their plan to overhaul the American tax code, calling for a near doubling of the standard deduction, fewer tax brackets, and a reduction of so-called “loopholes."
A Senate budget plan allows for up to $1.5 trillion in deficit spending over 10 years to pay for tax reform, but many experts say that’s not going to be enough for the ambitious proposal. Leonard Burman of the Urban-Brookings Tax Policy Center said the plan outline, though light on details, could cost up to $6 trillion.
“The problem is, it's very hard to tell exactly what it costs because they haven't settled on a top rate, they haven't said what income levels the tax rates kick in,” Burman said. “But it's really going to depend critically on the details which they haven't released, and they probably haven't worked out yet.”
Senior administration officials said the relevant Congressional committees will hash out the major details, but here’s what we do know on some of the big themes:
- Republicans want to move from seven tax brackets to three
- The rates would be 12 percent, 25 percent, and 35 percent, with an option of a fourth bracket for the wealthiest Americans
- That’s a lower tax rate for those at the top (currently 39.6 percent), and a higher rate for those at the bottom (currently 10 percent)
- The child care tax credit would be “significantly increased,” but it’s not clear by how much
Context: With these three tax brackets at roughly those rates, the proposal could reduce tax revenues by about $2 trillion over 10 years, Joe Rosenberg of the Urban-Brookings Tax Policy Center told us. And taxpayers in the middle of the income distribution could see a tax cut of around $700 a year.
The number of tax brackets we’ve had in America has fluctuated over the years. Back in the late ‘80s, we only had two, and at some points we’ve even had more than 50. (But hint: if you get a raise that bumps you into a higher tax bracket, the answer is to always take the money.)
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- The plan would nearly double the “standard deduction,” boosting it to $12,000 for single filers and $24,000 for couples. Currently, taxpayers have the option of itemizing their deductions (i.e. getting specific deductions on information you list on tax returns, like mortgage expenses and gifts to charity) or paying this standard deduction, which is a fixed amount.
- The plan would eliminate “most itemized deductions”
- However, “tax incentives” such as deductions for mortgage interest, charitable giving, retirement, and higher education are supposedly safe
- NOT included on the list of “safe” deductions is the state and local tax deduction, which would affect many residents in wealthy, democratic states like California and New York
Context: The standard deduction has been raised to provide tax relief to the middle class, but its original aim was to make paying taxes simpler. Initially, only a small percentage of (wealthy) Americans paid federal income tax.
But during World War II, the U.S. needed money — and a lot of it. To help fund the war, more than 70 percent of the population had to start paying up, meaning gathering taxes became more of a hassle. In 1944, Congress created the standard deduction so that taxpayers could just deduct 10 percent from their taxable income instead of keeping shoe boxes full of receipts.
- Corporate tax rates would drop from 35 percent to 20 percent
- Small business profits that are “passed-through” to owners would be taxed at 25 percent
- Businesses would be able to immediately write off the costs of new investments in depreciable assets for at least five years
- The plan outline calls for new limits on how much interest on debt businesses can deduct, but does not go into specifics
Context: Every percentage point cut in the corporate tax would cost the U.S. Treasury an estimated $100 billion over a decade.
Trump had initially been pushing for a 15 percent corporate tax rate, which could’ve added more than $2 trillion to the national debt over a decade, according to the Urban-Brookings Tax Policy Center. But 20 percent is more realistic to world tax rates, said Eric Hananel from the accounting firm UHY Advisors.
Alan Viard, from the conservative think tank American Enterprise Institute, points out that the current corporate income tax rate is higher in the U.S. than any other developed country.
But, it’s well known that many companies do not pay the actual corporate tax rate, and pay a much lower “effective” tax rates after deductions and other write-offs.
Viard advocates for taxing shareholders instead of corporations all together. But Lily Batchelder, a law professor at New York University, said the left is concerned about cutting taxes without fixing structural problems, adding that “Democrats tend to think that business tax reform should raise revenue.”
- Republicans would end the “worldwide” tax system and move to a “territorial” system. Companies would be able to bring profits earned overseas back to the U.S., tax-free, with a one-time tax on profits already accumulated overseas
- The plan calls for a repeal of the individual alternative minimum tax
- Also on the chopping block, the “death tax” and the “marriage tax penalty”
Context: President Trump paid $36.5 million in income taxes in 2005, according to the two pages from his tax return that were sent to journalist David Cay Johnston. One of the reasons he paid as much as he did is because of the alternative minimum tax, which is aimed at the wealthy, to ensure they don’t get to write off too much and pay too little.
And the marriage tax penalty came originally from an attempt to make taxes fairer. "A 10 percent increase in the marriage penalty decreases the likelihood of your getting married by 1 or 2 percent," said James Alm, an economist at Tulane University. “The main factor in regards to the marriage penalty is just kind of the notion of fairness. Is it appropriate that people's taxes should change, positively or negatively, simply because they're getting married?”