March 2019
In 2018 when President Trump and the Republican Congress rewrote the tax code, everyone knew there would be winners and losers. Exactly how this will play out is just starting to be seen – it closes loopholes while opening others and takes away some perks while creating new ones. Let’s see who the winners and losers really are by looking at the results of the tax law now and over time.
Winners and Losers Will Change Over Time
Almost all taxpayers get some type of tax cut; for example, the Tax Policy Center estimates that only about five percent of families will face an increased tax obligation in 2019. This sounds great! Initially, measured as a percentage of their total tax bill, things start out evenly. According to the nonpartisan Joint Committee on Taxation, households earning between $200,000 to $1 million will see a nine percent decrease in their tax burden compared to only an eight percent reduction for families earning $75,000 to $100,000.
Unfortunately, not everyone gets to keep their tax cuts over time because while the average rates dropped in 2018, they will return to 2017 levels by 2026 for individuals. The changes to corporate tax code are permanent. As a result, most taxpayers will see a modest tax hike by 2027, mostly impacting middle-income families.
Big Benefits Don’t Come Easy
Many Americans will benefit from the increase in the standard deduction, but they will no longer receive personal exemptions for themselves and family members, and many will lose the ability to itemize deductions. Some higher-earning small business owners, however, will benefit from a new 20 percent tax break for pass-through income. Above certain income limits, some professions such as health care, accounting and law, among others, are not entitled to this tax break. Those who are will need to use a complicated formula to calculate their benefit. Corporations face the most complexity, especially if they operate internationally, and will face increased compliance costs.
So, the winners are individuals who always had simple returns and pass-through business owners who qualify for the 20 percent break. The losers are taxpayers with several children, those who used to itemize extensively, and people who live in states with high taxes (the maximum deduction for the total of state and local taxes is $10,000).
Corporate Competitiveness Increases
The reduction in the top corporate tax rate from 35 percent to 21 percent brings the United States closer to other countries. According to the Tax Foundation, which ranks countries based on the competitiveness of their tax environments, this change moved the United States up four spots from 28th place to 24th place. For now, it appears most companies aren’t making major changes, but this could take more time to play out. Large corporations are unlikely to act until there is more certainty around how long the tax break will last. The United States will also have to hope that other countries don’t respond to even the playing field.
Who’s Footing the Bill
The tax bill was sold by many on the premise that the tax cuts would pay for themselves through economic growth generating enough revenue to offset the tax cuts. The Congressional Budget Office has a different view, estimating the tax changes will increase the federal debt by almost $2 trillion by 2027. Initial tax receipts suggest the CBO’s view is right, but it’s too early to tell.
Recognize that any time there are changes in the tax law, there will be winners and losers. These winners and losers change over time and often there are unintended consequences. For now, it’s clear who are the winners and losers in some respects, but in others it will take time.