Deconstructing the Republican Tax Bill
BY DAN DASKAL
On Dec. 22, 2017 President Donald Trump signed the Republican tax bill into law, stating that “it’s going to be fantastic for the economy.” The partisan reform to the tax code has, unsurprisingly, remained highly controversial, with neither economists nor the general public reaching a consensus on its impact. While Democratic House Minority Leader Nancy Pelosi described the tax reform as “the worst bill in the history of the United States Congress,” Republicans have lauded it as a substantial tax cut, benefiting both businesses and individuals across the income distribution. While it is the case that a great number of Americans will receive tax cuts, many of these cuts will be temporary and will not benefit everyone. The reforms constructed in the bill are complex, and its various intricacies must be examined in order to explain the discord regarding its passage.
The primary focus of the reform appears to be a substantial, permanent reduction in the corporate tax rate. The bill reduces the top corporate tax rate from 35 percent to 21 percent and eliminates the corporate alternative minimum tax. These reforms amount to an immense boon to businesses, drastically decreasing their tax obligations. The bill also shifts the U.S. away from its current worldwide tax system on businesses and will now solely tax firms’ domestic profits. In addition, there will be a one-time repatriation tax of 15.5 percent for cash held abroad, benefiting various multinational corporations, such as Apple and Microsoft that have kept hundreds of billions of dollars abroad as part of their tax minimization strategies. The relatively low rate of 15.5 percent will incentivize firms to bring the cash back into the U.S., with analysts such as Daniel Ives, head of technology research at GBH Insights, predicting that technology companies “will repatriate $300 billion to $400 billion in 2018, with Apple representing $200 billion of that amount.”
Economists largely disagree about how cutting corporate taxes will impact the economy as a whole. Douglas Holtz-Eakin, former director of the Congressional Budget Office and the president of the conservative American Action Forum, claims that the “incentives increase the accumulation of capital, whether in physical equipment or intellectual know-how. This capital deepening…reverses recent trends and raises productivity growth. More rapid productivity growth, in turn, raises the real wages of the middle class and restores upward mobility to a stagnant labor market.” Economic Nobel Laureate Paul Krugman, however, argues that “for a variety of reasons it would take a number of years for the capital stock to rise to its long-run level. And in the short run we wouldn’t expect wages to rise at all.” These economists make varying assumptions, and the true macroeconomic effects of the corporate tax reforms will not be known for some time.
Unlike the clear-cut benefits that the tax bill provides for businesses, its impact on individual taxpayers appears more convoluted. The bill retains seven individual tax brackets, lowering the rates of five of the seven, with the top marginal rate descending from 39.6 percent to 37 percent. Nonetheless, Republicans utilized a parliamentary procedure known as budget reconciliation in order to pass the bill with only a simple majority in the Senate, necessitating that the legislation not increase the deficit by more than the $1.5 trillion over the next ten years. In order to remain under this cap, individual tax cuts will expire after 2025. Although the bill nearly doubles the standard deduction, it limits certain itemized deductions such as the popular state and local tax (SALT) deduction to only $10,000, a provision that could raise the tax obligations of many in high-tax blue states such as California and New York. The bill also employs a new measure of inflation, known as the Chained Consumer Price Index. This is a slower measure that will cause the income ranges of the seven tax brackets, as well as the value of many tax credits, to grow more gradually, instituting an effective tax increase for many filers in the long run.
According to a report by the Tax Policy Center, a joint venture between the Urban Institute and the Brookings Institution, 53 percent of Americans will face a higher tax burden by 2027, with 82.8 percent of the gains going to the top one percent of income earners. The bill also eliminates the individual mandate of the Affordable Care Act, leading the nonpartisan Congressional Budget Office to estimate that 13 million people will lose their health insurance by 2027. Senate Majority Leader Mitch McConnell has painted the bill as a tax cut for the middle class, providing them with much-needed relief and benefits, yet its provisions suggest that this may only be the case in the short run. The vast majority of cuts will go to businesses, and the extent to which these cuts will ultimately benefit the middle class remains unclear.
As with all legislation, the devil really is in the details. Framing the bill as a middle-class tax cut is in Republican politicians’ best interest, as this will aid them in their re-election efforts. Nevertheless, a close analysis of the legislation illustrates a scenario that is far more complex, demonstrating the importance of independent research for understanding issues, as politicians’ claims may lead voters astray.