Photo credit: 401(K) 2012 via Flickr (CC-By-SA 2.0)
Depending on who you ask the Tax Cuts and Jobs Act (H.R. 1) that Congress passed this week will usher in the apocalypse or it is the best thing since sliced bread. Liberals have labeled this a tax break for the rich and big business. Some conservatives have complained about the progressive tax system staying in place, the child tax credit, as well as, the $1.5 Trillion deficit it will cause according to the Congressional Budget Office.
I haven’t written about it since it was in flux so I wanted to wait for the final product before weighing in.
1. I hoped for an overhaul of the tax system, but we got a tweak instead.
Ideally, I’d love to see a low flat tax or jettison the income tax altogether along by repealing the 16th Amendment and introducing a reasonable consumption tax on new goods and services (with food and necessities being exempt or by introducing a prebate, like what the Fair Tax suggests, in order to soften the impact of the change on lower-income Americans).
That’s my ideal. Here’s reality. Congress does not have the votes.
I’m not thrilled that we keep the progressive tax system in place, but doing nothing is not an option. Something is better than nothing. It’s sad that this bill represents the biggest reform in 30 years because it really does not represent that much change.
2. The liberal freak-out over this bill is mind-boggling.
I would somewhat understand if the bill represented a complete overhaul, but it doesn’t.
This bill tweaks the tax brackets, here are the charts for single filers and married joint filers:
This isn’t a radical change with the tax rates. The caps the mortgage deduction and limits other deductions. It also eliminates the personal deduction. The biggest change is doubling the standard deduction (more on that later). It also leaves the estate tax in place (which I think is utterly immoral), but expands the exemptions.
Complaining about the top marginal tax rate dropping from 39.6 percent to 37 percent is ludicrous. It is absolutely immoral that some Americans are compelled to give the federal government almost 40 cents for every dollar they earn. (37 cents per dollar earned is still way too high. Frankly, anything higher than 10 percent irks me.)
3. The corporate income tax changes are huge.
Corporate income taxes are where we see the biggest change. Lowering the corporate income tax rate to 21 percent permanently is huge. The Tax Foundation lists some of the other changes:
- Establishes a 20 percent deduction of qualified business income from certain pass-through businesses. Specific service industries, such as health, law, and professional services, are excluded. However, joint filers with income below $315,000 and other filers with income below $157,500 can claim the deduction fully on income from service industries. This provision would expire December 31, 2025.
- Allows full and immediate expensing of short-lived capital investments for five years. Increases the section 179 expensing cap from $500,000 to $1 million.
- Limits the deductibility of net interest expense to 30 percent of earnings before interest, taxes, depreciation, and amortization (EBITDA) for four years, and 30 percent of earnings before interest and taxes (EBIT) thereafter.
- Eliminates net operating loss carrybacks and limits carryforwards to 80 percent of taxable income.
- Eliminates the domestic production activities deduction (section 199) and modifies other provisions, such as the orphan drug credit and the rehabilitation credit.
- Enacts deemed repatriation of currently deferred foreign profits, at a rate of 15.5 percent for cash and cash-equivalent profits and 8 percent for reinvested foreign earnings.
- Moves to a territorial system with base erosion rules.
- Eliminates the corporate alternative minimum tax.
Jacking up corporate taxes helps no one. They get passed along in pricing, it hinders investment and charitable giving by businesses, and it stymies job creation.
But yeah, complain about companies not paying their fair share.
We have already seen companies announce raises, bonuses, new investment, and charitable giving as a result of Congress passing this bill.
4. This tax reform does help the middle class and working poor.
Those who claim this bill does not help the middle class and working poor are either deluded or they are lying.
The standard deduction going from $6,000 to $12,000 per individual or $12,000 to $24,000 per married couple will help the vast majority of middle class and working poor taxpayers. The vast majority of those taxpayers do not itemize. Expanding the child tax credit from $1000 to $2000 and increasing the current phaseout from $110,000 to $400,000 married couples will help lots of Americans – not just the rich.
5. Hallelujah, Obamacare’s individual mandate is gone.
One of the more offensive aspects to Obamacare, the individual mandate, will be effectively repealed by lowering the penalty to $0 effective January 1, 2019. No, this does not mean “millions will lose their healthcare,” what it means is that people won’t be forced to pay for plans they don’t want or can’t afford.
Conclusion:
I understand some taxpayers with high-value property in states with poor tax policy and a high cost of living will feel a pinch due to the cap on the mortgage deduction. The rest of the country shouldn’t be forced to have higher taxes because those states overspend and fleece their taxpayers as a result. Hopefully, that will force some change in those states. I’m also not thrilled with the deficit increase. That is a spending issue, however, not a revenue issue. Also, I’d encourage Congress to make the individual income tax changes permanent, right now most of the changes will expire on December 31, 2025. Let’s give American families more certainty.
