Republicans scored a major political victory Saturday when the Senate passed its own version of the Tax Cuts and Jobs Act. Only one Republican, Sen. Bob Corker (Tenn.), voted against the legislation. Because the Senate bill and House bill, which the lower chamber passed in November, differ, appointed members of each house will meet this week as part of a conference committee (and possibly next week as well) to hammer out the details of one final bill, which will then need to be passed by both the House and Senate before going to President Trump’s desk.
The new bill can contain only provisions that at least one of the existing bills already contains, and nothing that currently appears in both the House and Senate bills can be removed.
In previous articles, I’ve written about the significant benefits of the House plan, which I believe is the most important tax reform legislation passed in this country since the 1980s. The Senate’s bill is less impressive and contains some significant disadvantages that will hopefully be fixed during the conference committee process.
Below is a fair and well-researched overview of the “good, bad, and ugly” of the Senate’s bill passed on Saturday. Not every provision in the bill can be discussed here, but the most noteworthy aspects of the legislation are covered.
Like the House’s bill, the Senate bill would implement significant tax cuts for the overwhelming majority of taxpayers and businesses in the country. The Senate bill would retain the current tax code’s seven brackets, but it would cut rates in every bracket except for the lowest, which would continue to pay 10 percent of income. The new brackets would be: 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent and 38.5 percent. (For the income levels that apply to each bracket, go here.)
Although analyses vary widely, almost everyone, including left-leaning think tanks, agree that the average taxpayer in every tax bracket will receive a tax cut. That means most Americans will end up keeping more of their own money.
Under the Senate’s plan, many of the existing deductions will be removed, although not as many as in the House bill. This is a good thing, because the more deductions that exist, the more carve-outs there will be for special-interest groups and the more difficult it is for people to navigate the labyrinth of tax rules.
To make up for the lost deductions, the standard deduction would be roughly doubled. The new standard deduction would be $12,000 for single filers, $18,000 for heads of household, and $24,000 for joint filers. Increasing the standard deduction ensures most low- and middle-income people will not have to pay additional taxes and will benefit from a more simplified code. (The use of “exemptions” are eliminated in both the House and Senate bills, which also helps to simplify the code.)
Under current law, itemized deductions only apply if a filer chooses not to take the standard deduction, so by doubling the standard deduction, fewer taxpayers will need to worry about itemized deductions while continuing to enjoy greater tax benefits than what they receive currently.
Two advantages the Senate bill has over the House bill are that the Senate bill keeps (and improves) the medical expense deduction, which lowers the tax burden for people with very high medical bills. Like the House bill, the Senate bill also increases the child tax credit, but the Senate’s legislation boosts the credit to $2,000 per child and doesn’t phase it out for joint filers until income reaches $500,000. The House bill’s credit maxes out at $1,600 and begins to phase out at $230,000.
Tax credits are important for middle- and lower-income families, especially single-parent households, and the Senate’s increased credit amount all but guarantees most lower-income filers with children won’t pay any taxes. Many middle-income families with kids will also pay no federal income taxes.
Perhaps the best part of the Senate’s bill is that it reduces income tax rates for corporations and small businesses, an important measure to spur economic growth. Under the Senate’s plan, corporations will pay only 20 percent, compared to 35 percent today.
This will help ensure corporations don’t leave the United States (because our tax code will be much more competitive globally) and will likely draw corporations to America that previously decided against having significant operations here to avoid our high tax rates. Reducing the corporate rate will also free up billions of dollars for U.S. corporations to hire new employees, innovate and expand.
Further, lowering corporate taxes will likely continue the stock market’s historic rise, which is incredibly important for anyone with a retirement account. As Stephen Moore, a senior fellow at The Heritage Foundation, noted recently for the Washington Times, there are about 55 million Americans with 401(k) plans, 20 million have IRAs, and 20 million more have pensions. These investments, held mostly by middle-income and upper-middle-income families, will be much better off under the Senate’s plan, and it’s largely because of the corporate tax cuts.
The Senate legislation also provides a significant cut for small-business pass-through income. Many small-business owners would enjoy a 23 percent deduction for as much as 50 percent of their wage income. Because small businesses employ about half the U.S. workforce, this is an incredibly important tax cut for the country’s overall economic growth.
The Senate bill doubles the estate tax (death tax) exemption, to $11 million for single filers and $22 million for joint filers. With this new rule in place, very few people, including farmers and others who have been hurt by the tax in the past, will be eligible for the death tax. The Washington Post reports the number would be limited to about 1,800 filers per year.
Another positive in the Senate bill is that it makes the Obamacare penalty imposed on those who choose not to purchase “qualifying health insurance” $0, effectively ending the Affordable Care Act’s individual mandate. The individual mandate is immoral, and it should never have been imposed in the first place.
Finally, the Senate bill would allow deferred foreign profits to re-enter the United States at a rate of 14.49 percent for liquid assets and 7.49 percent for illiquid assets. The New York Times reports this could result in about $3 trillion currently stashed overseas coming back to America.
One of the most troubling aspects of the Senate bill is that millions of Americans, across a number of brackets, will end up paying more in taxes than they do now, even though their rates will be the same or lower. The reason for this is the Senate bill, like the House bill, changes the way inflation is calculated for the purposes of determining bracket income levels.
I’ll spare you the nitty-gritty details, but what you should know is that brackets change every year based on inflation. This is important because without bracket changes, people whose salaries remain flat or do not grow faster than inflation would be forced to pay more of their real income in taxes as inflation pushes them into higher brackets. The House and Senate bills slow the rate at which the bracket income limits increase, which means over time, some people whose income is close to reaching higher brackets (meaning brackets with higher rates) will end up moving into those higher brackets faster than they otherwise would.
Some supporters of the inflation change say it’s more accurate than the current measure, but no one should ever have to pay more in taxes than they do right now. If inflation rate calculations need to change, then tax rates should drop sufficiently for all people (or deductions should be made available) so that no one’s tax bill goes up. It’s true the inflation calculation change won’t affect the clear majority of taxpayers, but Republicans should never raise anyone’s total tax bill at the federal level.
Another negative in the Senate bill is that, although it doubles the exemption for the estate tax, it never phases it out completely (the House bill does). Regardless of a person’s income, the estate tax is immoral and imposes taxes on property twice, once when it was first purchased or built and then again when it is inherited. No one should have to pay taxes on inherited property, especially family members.
For those of us who support pro-liberty, limited-government policies, there are at least three extremely problematic issues with the Senate bill. First, it fails to achieve one of the Republicans’ primary goals: simplification. The Senate bill keeps the alternative minimum tax, an absurd tax provision that requires some people to do their taxes twice, maintains a slew of complex deductions few everyday people (and even some experts) understand and it doesn’t reduce the number of brackets. By contrast, the House bill wins in each of these areas, and thus would make the tax-filing process very easy for far more than half the population.
The second “ugly” provision in the Senate Republicans’ legislation is that most of the bill’s important provisions phase out by 2027, which means another bill would be required at that time to prevent many people’s taxes from rising back to their current levels.
Although this is important to keep in mind when evaluating the Senate bill, it’s likely unavoidable. Senate rules make it virtually impossible for permanent tax cuts to be passed without 60 votes in the Senate willing to end debate on a bill proposed through regular order. The current Senate bill is being proposed under budget reconciliation provisions, which allows the Senate leadership to push through a limited bill with just a simple majority. Without Democrats willing to agree to tax cuts, it’s not possible under the current rules to make the cuts permanent.
The third aspect of the Senate bill that is exceptionally problematic is it’s possible it will increase the national debt, which already stands at more than $20 trillion. Many conservatives believe cutting taxes increases economic growth and tax revenue. History has proven that’s often true, but it’s very hard to predict the extent to which tax revenue will increase and how long the increase will last.
At some point in the very near future, Congress needs to bring federal spending under control by reforming key entitlement programs (Medicaid, Medicare, and Social Security), reducing fraud and waste and slashing bloated federal budgets. If Congress cuts taxes but fails to also cut spending, in the long run, it will be a complete disaster and put our entire economy in grave danger.