Tax legislation passed by the Republicans last week does not significantly simplify tax filing, nor does it provide tax reductions for everyone. Lower and moderate income payers will have about twice the standard deduction and child tax credit, which are reductions and simplifications, while some individuals’ tax bills will decline depending on how income is earned and where they live.
The wealthiest will save money with a reduction in their tax rate, as will the small number who inherit very large estates.
What the tax bill does do in a grand way is to give Republicans a chance to prove that reducing federal business taxes will lead to business expansion, employee hiring and increases in wages.
Most business-related reductions are permanent, while some of the individual benefits have an eight-year life in order not to exceed the mandated $1.5 trillion maximum impact to the deficit.
Plenty of economists, not just members of the other political party, are skeptical of those expectations. And, they doubt that the business tax changes will sufficiently energize the economy to offset more than a third of the $1.5 trillion total cost over 10 years of the tax reductions.
The legislation’s headliners are reducing the corporate tax rate of 35 percent to 21 percent, and lowering taxes on businesses which pass income and expenses through to their owners. There is a cap on just how big those businesses can be, but expect accounting firms and lawyers to be busy shaping “pass through” ownership structures perhaps in imaginative ways. The reward eliminates 20 percent of income from taxation.
The new pass through benefit will likely be embraced, while the reduction in the corporate rate may have only a limited effect. Corporations have on average been paying about 28 percent, and some much lower. Many corporations already have plenty of cash (a few have been borrowing at the low interest rates) which could have been used for expansion and wage increases; lower taxes is only one factor in business decisions.
Expect the larger post-tax profits to go to shareholders.
To partially pay for the tax reductions, there will be a cap on the amount of local taxes which can be deducted. Combine that with the larger standard deductions and voters may be less likely to support local tax increases. That favors the Republican less-taxation ideology, but voters tend to be more accepting of local taxes, being more apt to see how their tax money is spent and knowing local decision makers. Fewer taxpayers who itemize may reduce charitable giving somewhat, as well. That can be considered a price of simplification.
Other income will come from a more conservative cost of living index, reducing the mortgage interest deduction from amounts up to $1 million to $750,000, and eliminating moving expense deductions. Some are small, and the tax code continues to be broad and detailed.
The U.S. economy has been growing steadily since the 2008 recession, with a low and going lower employment rate and a soaring stock market. Will the tax changes, which so heavily benefit business, result in an even stronger economy which benefits workers, and not instead add to the deficit? Republicans are now even more closely linked to that expectation.
— The Durango (Colorado) Herald,