It could pass as early as this week.
Congressional Republicans have struck a deal on tax reform, enabling them to pass a final bill shortly after the House and Senate each passed its own proposal.
The combined proposal would slash corporate tax rates permanently, offer temporary cuts for individuals, and repeal the individual mandate in Obamacare, a $338 billion health care cut that leaves 13 million more people uninsured by 2027. The result is that by that year, when the individual cuts expire, most Americans will be worse off due to higher taxes and lower health care coverage, while rich people who own shares in corporations will continue to benefit.
Overall, it bears a closer similarity to the Senate bill than the House one. But there are important differences that set it apart from both previous proposals.
It sets a top individual income tax rate of 37 percent, below 38.5 percent in the Senate bill and 39.6 percent in the House bill (which is also the rate under current law). It finances that with a slightly higher corporate tax rate of 21 percent. It retains a more generous deduction for state and local taxes, and limits the mortgage interest deduction slightly for wealthy homeowners. The bill also eliminates the corporate alternative minimum tax, which added to the Senate bill and would’ve amounted to a $250 billion corporate tax hike.
And Republicans are on track to pass the bill into law the week of December 18 — well before Democratic Senator-elect Doug Jones is sworn into office, weakening the party’s Senate majority.
Before delving into the bill’s details, it’s worth taking a moment to consider who, all told, comes out ahead and behind.
As of this writing, we do not have an official analysis from Congress’s Joint Committee on Taxation. But the nonpartisan Tax Policy Center has run the numbers on the compromise bill. Note that the TPC analysis ignores the changes to the top individual rate, expansion of the state and local tax deduction, slightly higher corporate rate, and mild limits on the mortgage interest deduction included in the most recent House-Senate deal. It also excludes the effect of eliminating the individual mandate, which effectively reduces the amount of Medicaid and insurance subsidy money going to poor and middle-income people, and increases premiums on many upper-middle-class people too. On net, the poor would actually lose out in all years once this effect is taken into account.
With that in mind, here’s the big picture:
The story is very different in 2018 and 2025 compared to 2027, because at the end of 2025, all cuts for individuals expire. However, a significant tax increase — the use of a slower-growing inflation index, chained CPI, to adjust tax brackets — remains, as do corporate tax cuts. That means that rich and very rich people who own many shares of stock gain tremendously still, but middle- and upper-middle-class individuals who had been benefiting from individual rate cuts lose out.
You can see the effects of the bill in more granular detail in the following table. TPC finds that the top 1 percent of taxpayers earn 82.8 percent of the benefits from the cuts by 2027, and the top 0.1 percent earn 59.8 percent of the benefits:
But these averages obscure important differences within income groups. Some people earning $200,000 a year will pay less in taxes in 2027. But others will pay more, which can be obscured by a finding that, say, the 80-90th percentiles as a whole will get a $100 tax cut on average.
TPC modeled out for 2018,2025, and 2027 what share of each group will see taxes go up and down. Here’s 2027:
Overall, 53.4 percent of taxpayers see their taxes go up, with an average hike of $180; but 25.2 percent see their taxes go down, by $1,540 on average.
These percentages vary widely between income groups. Within the middle quintile, people earning $54,700 to $93,200 a year, 69.7 percent would see their taxes go up. But only about 8 percent of the very richest one-thousandth of Americans would see a tax hike.
Note, again, that this doesn’t take into account the effect of cutting health care.
Republicans argue that 2018 is a better year to look at than 2027, as they argue that, despite writing the bill so that individual cuts expire, they hope to make them permanent in the future. While it’s somewhat disingenuous to demand that your bill be evaluated not as it’s written, but as it might be amended at some later date, here in the interest of fairness is TPC’s 2018 projection:
In this scenario, 80.4 percent of Americans get a tax cut, and the average American household in the middle quintile would get a $930 cut. But 4.8 percent of Americans would see taxes go up, with hikes concentrated in the upper middle class and among the very rich. Only 20.5 percent of the benefit would be concentrated in the top 1 percent (far lower than in 2027), but 65.3 percent goes to the richest fifth of Americans.
Before delving into the bill’s details, it’s worth taking a moment to consider who, all told, comes out ahead and behind. Here’s who would be better off:
The GOP’s tax reform proposal would leave other groups worse off:
Standard benefits for families are changed significantly, with an eye toward simplifying the vast array of benefits (standard deductions, personal exemptions, child credits, etc.) currently available:
“Pass-through” companies like LLCs, partnerships, sole proprietorships, and S corporations, which are overwhelmingly owned by rich individuals like Donald Trump and currently pay normal income tax rates after their earnings are returned to the companies’ owners, would get a number of tax cuts too:
Additionally, the exemption for the estate and gift tax, the most progressive component of the federal tax code, only paid by extremely rich estates, is doubled. The alternative minimum tax for individuals, which limits tax breaks for wealthy taxpayers, is retained in more limited form. And a brand new 1.4 percent tax on university endowment income is added.
For the public at large, the case for a massive corporate tax cut is sort of hard to grasp. Seventy-three percent of Americans, and 53 percent of Republicans, say they want corporate taxes either kept the same or raised, according to Pew Research Center polling. That the cuts are paired with some tax increases on individuals, like the elimination of the deduction for state and local income taxes and the Social Security number requirement, which kicks some 3 million kids off the child tax credit, makes the choice even more confounding.
But the GOP has a specific economic theory that it claims supports the bill and makes the changes it envisions worthwhile.
The basic idea is that while most economists believe corporate taxes are primarily paid by owners of capital (that is, people who own stock in corporations) in the form of lower profits, a sizable minority, including White House chief economist Kevin Hassett, think that a lower tax rate would spark so much additional investment in the United States that it would bid up wages and leave the middle class better off through its indirect effects.
