I don't harbor any illusions that major tax reform is likely, but for those concerned, here is o
Republicans unveiled their bill to overhaul the U.S. tax code Thursday morning, and there were some major winners and losers.
The top GOP tax writer, House Ways and Means Committee Chairman Kevin Brady (R-Tex.), foreshadowed just how hard it would be to craft the biggest rewrite of the tax code since 1986 when he said in August: “Tax reform is hard. It's the challenge of a generation.”
Here's a rundown of who is happy and who isn't as the details emerge regarding the “Tax Cuts and Jobs Act,” the centerpiece of President Trump's “MAGAnomics” agenda.
Big corporations. American mega-businesses would get a substantial tax reduction. The bill cuts the top rate that large corporations pay from 35 percent to 20 percent, the biggest one-time drop in the big-business tax rate ever. On top of that, companies would get some new tax breaks to help lower their bills, such as the ability to deduct all the costs of purchasing new equipment, as well as a special low rate on any money they bring back to the United States from low-tax countries such as Ireland. Many businesses have been holding cash overseas to avoid 35 percent U.S. taxes. Now they would get to bring the money home at a tax rate of 12 percent. The entire business tax system would also change from a worldwide system, in which money anywhere around the globe is taxed, to a territorial system in which it's mostly money made in the United States that is taxed. Businesses have long lobbied for this change
The estate tax, often called the “death tax” by its critics, would go away by 2024, meaning wealthy families would be able to pass on lavish estates and trust funds to their heirs tax-free. At the moment, only estates worth over $5.49 million face the estate tax (the GOP plan doubles that amount immediately until the tax goes totally away). The mega-wealthy also would get to keep charitable deductions, a popular way to lower their tax bills, and they no longer would have to pay the alternative minimum tax (AMT), a safeguard against excessive tax dodging that's been in place since 1969.
People paying the AMT.
The bill eliminates the alternative minimum tax, which forces people who earn more than about $130,000 to calculate their taxes twice, once with all the deductions they can find and once with the AMT method, which prevents most tax breaks. There is perhaps no better example of how much this will benefit the rich than that fact that Donald Trump would have paid $31 million less in taxes in 2005 (the one year for which we have his tax returns) without the AMT.
"Pass through" companies.
Some wealthy Americans who run businesses structured as sole proprietorships, partnerships or LLCs would get a sizable discount on their taxes. Under the GOP bill, these "pass through" companies would pay a tax rate of only 25 percent on 30 percent of their business income, a big reduction from the 39.6 percent rate some pay now. The bill tries to prevent "service firms" like law firms and accounting firms from being able to pay the lower 25 percent rate, but a good tax lawyer can probably make the case for these firms to qualify. Also, on the campaign trail, Trump said that hedge funds were “getting away with murder” on their taxes and that he would take away carried interest, the popular opening in the tax code these Wall Street titans use. But the bill does not change or eliminate carried interest, which is also used by some real estate developers.
The legislation would cut in half the mortgage interest deduction used by millions of American homeowners, changing the deduction’s rules for new mortgages. Presently, Americans can deduct interest payments made on their first $1 million worth of home loans. Under the bill, for new mortgages, they would be able to deduct interest payments made only on their first $500,000 worth of home loans.
Home-builder stocks are plummeting as a result, since many builders make a lot of their money from constructing high-end mansions. In addition to capping the mortgage deduction, the bill also caps the state-and-local-property-tax deduction to $10,000 a year, another hit to higher-end homeowners. That said, many economists and even some Democrats say these limits are a good idea because the housing incentives in the current tax code favor the wealthy. The National Low Income Housing Coalition says mortgages over $500,000 are rare: Only 5 percent of mortgages are more than that
Some) small-business owners.
The National Federation of Independent Business, which represents 325,000 small businesses, said it would not support the GOP bill, because it “leaves too many small businesses behind.” The original idea was to lower small businesses' taxes to 25 percent, but the language in the bill allows small-business owners to pay only 30 percent of their business income at the 25 percent rate. The rest would be paid at the business owner's individual tax rate. Any individuals earning over $200,000 a year (or couples earning more than $260,000) would pay the rest of their taxes at a rate of 35 percent.
People in high-tax blue states.
Say goodbye to most of the state-and-local-tax deduction (SALT). Over a third of filers in many Democratic states such as California, New York, New Jersey and Connecticut claim the SALT deduction on their returns. Under the GOP plan, people would still be able to deduct up to $10,000 on the property taxes they pay locally, but they would no longer be able to deduct the other taxes they pay to state or local governments from their federal tax payments.
The working poor.
While the bill includes lots of tax breaks for big businesses and the rich, the bottom 35 percent of Americans do not get any extra benefits, according to Lily Batchelder, who served on President Barack Obama's National Economic Council. They already have a $0 federal tax liability. Some argue a more equitable tax system would increase the credits (money back) that lower-income families get, especially those that work low-wage jobs. The GOP preserves the earned-income tax credit, a popular refundable credit for the working class, but the bill does not expand it.
The National Council of Nonprofits warns that charitable deductions are likely to go down under this bill. While the GOP enables the wealthy to continue deducting their charitable giving, many middle- and upper-middle-class families would no longer get that tax break, because they probably would stop itemizing their deductions. At the moment about 30 percent of Americans itemize, but under the GOP bill, the standard deduction roughly doubles from $6,350 to $12,000 for individuals and $12,700 to $24,000 for married couples, meaning fewer people would probably itemize. The GOP argues that middle-class people should end up giving more to charity since they will pay less in taxes.