The first draft of House Republicans’ new tax bill, the Tax Cuts, and Jobs Act, was released last Thursday and marks the first step in the GOP’s journey to provide large-scale tax relief to the American people.
The bill is mainly designed to afford an across-the-board tax cut to individuals and businesses, and simplify the tax code by lowering the number of tax brackets and eliminating certain taxes and deductions.
President Trump applauded the Act in a statement on Thursday, outlining his priorities in regard to tax reform:
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.
The Act reduces the number of tax brackets to four from seven:
|Single||Married||Head of household|
|12.0% > $0||12.0% > $0||12.0% > $0|
|25.0% > $45,000||25.0% > $90,000||25.0% > $67,500|
|35.0% > $200,000||35.0% > $260,000||35.0% > $230,000|
|39.6% > $500,000||39.6% > $1,000,000||39.6% > $500,000|
Under the new tax brackets, everyone making less than $200,000 a year will see a decrease in the amount of taxes they pay regardless of what bracket they’re in.
The Act also raises the standard deduction by almost double the current amount.
|Single||Married||Head of household|
The child deduction is also raised from 1000 to 1600 dollars.
The bill eliminates a number of taxes, including estate and gift taxes and the Alternative Minimum Tax, as well as most local and state tax deductions. It should be noted that the estate tax is only eliminated after the year 2024, though it will only apply to estates over 11 million dollars for those six years. Mortgage, charitable, and property tax itemized deductions remain, although the property tax deduction is limited to $10,000. The property tax limitation, as well as the elimination of the local and state tax deductions, is most likely an attempt by Republicans to force states with high taxes (like California and New York for example) to lower them. This also prevents states from essentially taking tax revenue meant for the federal government and keeping it in their state.
The corporate tax rate is set at 20 percent, down from 35 percent and many business deductions are eliminated.
How does the Tax Cuts and Jobs Act Compare?
The Tax Foundation found (https://taxfoundation.org/tax-cuts-jobs-act-state-impact/) that the new tax plan would create close to a million jobs in the United States over a 10-year period and would “significantly lower marginal tax rates and the cost of capital, which would lead to 3.9 percent higher GDP over the long term [and] 3.1 percent higher wages.”
This is an obvious consequence of the reduction of the corporate tax rate, letting businesses keep more of the wealth that they create. If businesses make money off 65 percent of their profits, would they not make more with 80 percent of it? More money left in the hands of businesses translates to higher wages and more jobs. When businesses make a profit that money doesn’t go into the dusty coffers of a wealthy executive’s bank account. Unless one’s goal is indefinite stagnation, that money is immediately invested back into the business. For example, let’s look at a large business, like Walmart. Walmart makes money from consumers purchasing products from their stores. Therefore, it is in Walmart’s best interests to operate as many stores as possible. For Walmart’s stores to operate, Walmart needs to first purchase products from a supplier, transport the products to their stores, and run their stores, providing jobs for everyone involved in this process. Walmart isn’t taxed on the money they use to pay for the products they sell in their stores or the money they use to pay their employees.
This in a way encourages large salaries for CEOs and other executives, since money is worth more in the form of a large bonus to an executive than it is as profit as a consequence of taxation. Walmart is, however, taxed on their profits, which is the money the company uses to build new stores, distribution centers, etc. If Walmart is able to keep more of their profits, Walmart will open more stores, thereby employing more people. Walmart knows that it needs to open more stores to make more money, so it has already dedicated a percent of its profits to go to opening said stores. If they are able to keep an increased percentage of their profits, they will have more money available to pay employees as well, leading to an increase in employee pay. Walmart can also afford to lower its prices since lower taxes on profit leads to increased profit margins.
Taxes on businesses also lead inherently to a decrease in production. This idea is explained in the book “Economics in One Lesson” by Henry Hazlitt:
“When a corporation loses a hundred cents of every dollar it loses, and is permitted to keep only fifty-two cents of every dollar it gains, and when it cannot adequately offset its years of losses against its years of gains, its policies are affected… In brief, capital to provide new private jobs is first prevented from coming into existence, and the part that does come into existence is then discouraged from starting new enterprises. The government spenders create the very problem of unemployment that they profess to solve.”
Hazlitt describes more extreme circumstances than what currently exists, but the idea that a high corporate tax keeps businesses from expanding and investing holds true. Currently, the United States has the highest corporate tax rate among the world’s developed countries (although it should be noted that businesses don’t pay the amount in full because they are able to make deductions from that rate). This acts as an obstacle for businesses to compete in a global market and results in companies moving more of their operations overseas.
This idea also applies to high-income taxes among the wealthy. When people have a large percentage of their income taken from them, their incentive to work and invest diminishes as does the return on their work and investments. This is the idea behind the Laffer curve, which basically states that
- Taxation discourages production
- Once taxes rates get too high, the government starts to lose money.
This tax theory made up a large part of “Reaganomics” (the name coined to encompass the economic policies of the Reagan administration), which proved to be widely successful since one of the largest tax cuts in modern history yielded almost a doubling of government tax revenue. In fact, the Tax Foundation found that the tax cuts would lead to an increase of nearly one trillion dollars over the next 10 years due to an increase in business revenue.The Laffer curve shouldn’t be solely relied on to determine the optimum tax rate though since it should not be the aim of the government to rid its citizens of the most money possible but to determine the least amount of money the government needs to operate.
An argument against the tax plan is that it would lead to a decrease in government revenue and therefore an increase in debt. This claim in itself is debatable, but even if it were true it ignores the fact that debt isn’t efficiently decreased by an increase in taxation, but by a decrease in spending. For the last two years, the US government has taken in around 3.5 trillion dollars in tax revenue. If we just did away with social security, stopped paying people for not working, and privatized the healthcare industry we’d be well into paying off the looming monstrosity that is the national debt. Unfortunately, Congress is replete with ineffectual politicians who revere reckless government spending and succumb to the fallacy that they, in their infinite wisdom, can conjure the antidote to all of life’s problems. The reality is that government is sluggish, wasteful, and inefficient, but exists as a necessary evil, and when curtailed effectively, can serve to protect the life, liberty, and property of its citizens.
The Tax Cuts and Jobs Act is a step in the right direction for US tax policy and does a good job of achieving the president’s goals of simplifying the tax code, eliminating unnecessary deductions, and lowering corporate tax rates. If this bill goes through it would mean higher wages and more jobs for American citizens.
Hazlitt, Henry. Economics in One Lesson. Crown Business, 1988.