Bill delivers major tax cuts to corporations and benefits top earners
After months of outlining and delay, Republicans in the United States House of Representatives have finally released their first draft of their highly anticipated tax reform bill on Thursday, November 2.
Introduced by the House Ways and Means Committee, the heavily detailed Tax Cuts and Jobs Act is a sweeping reform that seeks to simplify the current U.S. tax code. The $1.5-trillion plan promises the kind of tax system favored by businesses, as it delivers a significant tax cut for corporations and more conservative savings for the middle-class.
According to calculations by the Joint Committee on Taxation, the bill would garner about $1 trillion in net cuts. At its core, the bill is a win for corporations, which will see its corporate tax rate cut from 35 percent to 20 percent, a shift that is measured to decrease federal revenues by $1.5 trillion over the next 10 years.
In general, the legislation promises major tax cuts for wealthy Americans who tend to benefit from corporate tax cuts than most Americans. Americans that earn between $400,000 to $1 million a year would face drastically lower top income tax rates.
Moreover, Americans that tend to earn a profound share of their income from capital (i.e. stock sales, dividends, etc.) also benefit from the corporate tax cut.
In a statement delivered on Thursday, Trump applauded the House for sticking to tax reform priorities long desired by conservatives.
“My tax reform priorities have been the same since day one: bringing tax cuts for hardworking, middle-income Americans; eliminating unfair loopholes and deductions; and slashing business taxes so employers can create jobs, raise wages, and dominate their competition around the world,” Trump said in a statement.
Although the bill does cut taxes, it doesn’t do much for middle-income Americans whose incomes don’t qualify them to receive the significant tax cuts.
The bill simplifies the seven-bracket tax system to just three tax brackets: 12, 25 and 35 percent, which means that Americans are now subjected to different income tax rates.
The threshold for the top 39.6 percent of individual income raises to $1 million for couples, an increase from $470,700. In other words, this bill shifts the definition of “wealthy American” because of its change in the consolidation of its tax brackets.
For example, Americans who make $600,000 to $700,000 will get a sizeable cut in their income taxes because they are subjected to the 12 percent tax rate; before they would have been taxed at 15 or 25 percent.
Due to the elimination of the state and local income/sales tax deduction, people residing in blue states would also pay higher taxes. Wealthier residents who benefit from these deductions would also see increases in income tax, but it could be counteracted by other tax cuts detailed in the bill.
California, which has the highest state income tax rate, would see disproportionate damage.
“[The bill is] really so punitive to certain states and, to California, it is devastating,” House Minority Leader Nancy Pelosi (D-Calif.) said at a press conference on Thursday. “It removes over $100 billion of possible tax deductions against – over $100 billion for our state. Did they ever check with our economic or our finance department in our state to see what the impact would be on that state? No.”
Additionally, the change in mortgage interest deductions in the housing sector would reduce the incentive to buy and build homes, which would deliver a significant blow to homeowners. The deduction would apply to home purchases and mortgages made after Nov. 2, which experts say would put homeowners and the housing industry at risk.
“Contrary to their assertions, the Republicans are picking winners and losers,” Chief Executive of the National Association of Homebuilders Jerry Howard told the New York Times. “They are picking rich Americans and corporations over small businesses and the middle class.”
Another significant measure listed in the bill that would affect families details the elimination of tax-free savings accounts for child and dependent care.
An unlikely passage
As is the case with many major bills, the Tax Cuts and Jobs Act is likely not to stay in its current form and would need changes to satisfy lawmakers in high-tax states.
The increase in budget deficient promised from its corporate tax slash would certainly raise the deficit over the next decade, an outcome which would guarantee strong challenge in the Senate.
Per Senate rules, some legislation can pass with only 51 votes, so long as the bill doesn’t result in long-run deficit increases. Since this current draft violates that stipulation, it would need 60 votes, meaning unlikely profound support from the Democrats.
But the bill was also met by reservations from Senate Republicans, who are looking to push for changes to the bill, specifically reducing the overall cost that the bill entails.
Sen. Bob Corker (R-Tenn.) hasn’t been shy about his criticisms of Trump and the Republican Party and on Thursday blasted the current version of the bill for increasing the overall deficit — a goal shared by all Republicans.
“As I have made clear from the beginning of this debate, it is my hope that the final legislation — while allowing for current policy assumptions and reasonable dynamic scoring — will not add to the deficit, sets rates that are permanent in nature and closes a minimum of $4 trillion and loopholes and special interest deductions,” Corker said.
Amid the controversy and backlash surrounding the GOP House tax bill, Republicans have emphasized that the initial draft would be far from the final product.
A day after the bill was introduced, Ways and Means Committee Chair Kevin Brady (R-Texas) offered an amendment that would delay the repeal of tax-free savings accounts for child care. He also plans to amend the tax on private university endowments, which would affect schools that receive endowments that measure to $250,000 per student, rather than $100,000 per student.
However, the amendments proposed don’t do much to the estimated increase in the federal budget deficit.
According to the Congressional Budget Office (CBO) — the nonpartisan wing of Congress that estimates the financial outcomes of proposed legislation — found that the bill would raise the federal budget deficits by $1.7 trillion in the next decade.
Additionally, U.S. debt would increase to 97.1 percent of GDP in 2027, up from 91.2 percent under current CBO estimates.
The election on Tuesday, Nov. 7, also presented as potential roadblocks as the GOP attempts to establish their landmark tax reform.
Democrats handily won gubernatorial races in New Jersey and Virginia; particularly, Democrats also have the power to take control of the Virginia House of Delegates, which could provide a sizable challenge to the GOP.
“I mean, it could, because the elections went against the Republicans,” said Senate Finance Committee Chairman Orrin G. Hatch (R-Utah) said of how the recent elections could shape the bill going forward.
When probed about whether pressure to shape the tax plan’s benefits in favor of the middle class, Hatch assured, “I think we’ve been moving that way anyway.”
House Speaker Paul Ryan, however, remained hopeful that the elections won’t affect the bill’s success and intends to go forth with the House plan, which would raise the deficit and deliver radical cuts to corporations and the affluent.
“It doesn’t change my reading of the current moment,” Ryan said Wednesday morning. “It just emphasizes my reading of the current moment, which is we have a promise to keep and we have to get on with keeping our promise.”
Maintaining the bill benefits all Americans, Ryan added: “I fundamentally believe, when we deliver on comprehensive tax reform and tax relief…I think that’s going to bear fruit politically, but most importantly, it’s going to help people.”