As the first major reform of the US tax code since 1986, President Trump’s Tax Act was signed into law on December 22, 2017. Officially known as the Tax Cuts and Jobs Act, the act has proved incredibly controversial. The 503-page document was pushed through both the House of Representatives and the Senate at record speed, leaving many scrambling to understand both the content of the bill and its implications. Luckily, we’re here to break down the three major things you should know about Trump’s tax cuts.
The Bill Slashes Corporate Tax Rates
One of the key major changes in Trump’s tax legislation is that it cuts the United States’ corporate tax rate from 35 percent to 21 percent. That’s good news for many US-based corporations. Analysts and executives expect that corporate earnings will enjoy an increase in the ballpark of 10 percent thanks to the reductions, with some companies potentially seeing increases in earnings of up to 30 percent. Republicans maintain that this increase in corporate earnings will galvanize the economy, incentivize investment, and encourage wage growth.
“Companies with relatively high tax rates and mainly US-based revenues, which are not hit by the new charge on overseas assets, will gain the most from the new code. Oil refiners, railroads, airlines, and banks are expected to be among the biggest beneficiaries,” Ed Crooks and Katrina Manson explained in the Financial Times shortly before Trump signed the bill into law. For example, the US-based Delta Airlines has announced that it expects the slash in taxes to significantly increase its profits by around 19 percent. Berkshire Hathaway, Warren Buffet’s conglomerate, is also forecasted to be a big winner, with projected increases in earnings totaling around 15 percent. US oil companies like Andeavor and Valero Energy are expected to see big savings, as are equipment manufacturers like Emerson Electric, United Technologies, and Honeywell.
But this decreases corporate tax rate won’t necessarily translate into big financial benefits for all companies. Companies with international operation, including big tech companies, will likely face a higher tax bill this year in spite of the lower rate because of a new levy the act places on cash held by companies outside of the United States.
The Tax Cuts Are Expected to Increase the Deficit
Trump’s tax act includes tax cuts for both corporations and individuals, which is pretty expensive. All in all, the tax bill is forecasted to cost the country somewhere around $1.5 trillion over the course of the next five years (or around $1 trillion after adjustment for economic growth). This has faced fierce criticism from budget hawks and Democrats alike, but some allege an expanding deficit isn’t necessarily the catastrophe it might seem. Many argue that the large, deficit-financed tax cuts will ultimately spur the economy back to its full potential growth trajectory and help to bring more workers back into the workforce.
Most Tax Breaks for the Middle Class Expire in 2025
The new tax plan lowers the individual tax rate and increases the standard deduction. According to analysis from the Tax Policy Center, the act does decrease the tax burden of Americans in virtually all income groups and increases post-tax income by an average of 2.2 percent for American families. But the problem is that the individual provisions in the tax bill – widely hailed as important tax cuts for the middle class – actually expire in 2025. That’s because of a Senate budget rule that essentially caps the cost of the bill. So while the tax cuts for corporations will remain permanent, the individual tax cuts will not.
“In their budget reconciliation instructions, Republicans allow for this bill to carve a $1.5 trillion hole in the deficit over the first 10 years. Due to Senate rules, the bill ultimately cannot increase the deficit any more after the 10-year mark. To meet this requirement, Republicans end almost all the individual tax cuts in 2025 and make the corporate tax cuts permanent,” Tara Golshan explained in Vox. “The result will be a tax increase in 2027 for more than half of all Americans – 53 percent, according to an analysis from the Tax Policy Center.”
However, a number of noteworthy Republicans, including House Speaker Paul Ryan, insist that they have every intent to renew the individual tax cuts to ensure that they don’t expire and prevent tax increases for Americans. The problem with this plan is that it will likely balloon the deficit even further – potentially by upward of $2 trillion.
The bottom line? As the first major reform to taxes in nearly 3 decades, there is certainly a lot to take into consideration when it comes to Trump’s tax act and its implications. Ultimately, only time will tell how the act impacts the economy.
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