The first thing you need to know about the Republican tax bill, the Tax Cuts and Jobs Act, introduced on Thursday is that this it is not the final product.
The next thing you need to know is that Republicans consider this tax bill a matter of life and death (politically speaking). Failure to pass it will mean almost certain defeat for them in 2018, Republicans believe. “If we don’t, that’s probably the end of the Republican Party as we know it,” Sen. Lindsey Graham of South Carolina recently put it.
As such, expect Republicans in Congress to push through every obstacle and be more willing to compromise in order to pass something. Taxes affect everybody in the country and every special interest is Washington, which is why reforming the system, even with party control, is often so difficult. That became apparent immediately on Thursday when some interests groups came out swinging against the bill.
The quick summary of the bill is that it sharply reduces taxes on corporations, simplifies the individual tax code, and expands the standard deduction. The tax bill does not pay for itself and could expand the $20 trillion-plus deficit by over a trillion dollars or more. Republicans claim that greater economic growth will ultimately solve that, but past tax cuts have not fulfilled that promise.
But the Tax Cuts and Jobs Act does pay for some of the sharp corporate tax reduction by eliminating or lowering many deductions for individuals even while expanding the standard deduction. This will disproportionately affect people in blue states with more urban populations which generally have higher local taxes. The bill also attempts to pay for the large corporate tax cut by raising taxes on multinational corporations and foreign companies operating in the U.S.
Here is a more thorough breakdown of the bill:
Corporate taxes go way down
The corporate tax rate goes from 35 percent to 20 percent which the GOP bragged is the “the largest reduction in the U.S. corporate tax rate in our nation’s history,” in a talking points handout. This is the centerpiece of the tax bill for the GOP. From the very beginning when this was just a “framework,” the 20 percent rate was there while all the other details were left to work out. It is the key, Republicans claim, to jump-starting the American economy.
President Donald Trump’s economic adviser said in September that there is “no room to negotiate” on the the 20 percent rate. But this deduction is paired with closing loopholes and raising some money elsewhere because the budget rules only allow for the budget deficit to increase by $1.5 trillion over the next decade. As the bill is written, it increases the deficit by $1.51 trillion over the next decade.
Some deductions go away
The bill pays for some of the tax cuts by eliminating deductions, some of them popular. Those include the medical expense deduction, the deduction for state and local income taxes, and capping the mortgage interest deduction at $500,000. Republicans argue that the cost of these deductions will be offset by lower overall tax rates, the expanding of the standard deduction, and a stronger economy.
Know your bracket
The number of tax brackets goes from seven to four. It preserves a top rate of 39.6 percent on income over $1 million, and establishes three new brackets: 35 percent on income from $260,000 to $1 million, 25 percent on income from $90,000 to $260,000, 12 percent on income from $24,000 to $90,000. People making under $24,000 will not pay income tax.
The standard deduction goes up
The standard deduction just about doubles, going from $6,530 to $12,000 for individuals and from $12,700 to $24,000 to married couples. Republicans say that this expansion will help offset costs incurred by the closing of other deductions.
Big incentives for multinationals to move profits home
The bill also proposes a global minimum tax of 10 percent on income that American companies’ high-profit subsidiaries earn around the world. Currently, that income is only taxed when brought back to the United States but this would impose a tax without the money being brought back. In order to help offset that extra tax, the bill also allows companies to bring back cash stored overseas and only pay a 12 percent tax rate instead of the 35 percent rate.
The new global minimum tax is meant to incentivize companies to keep their operations in the United States and prevent them from shifting profits abroad. But it is divisive within conservative circles. Some conservative see it as undermining the very point of the tax bill, which is ostensibly to make American businesses more competitive abroad.
“We strongly oppose adding a new tax that would raise prices on everyday goods while disproportionately hurting the poor and middle class,” said Americans for Prosperity President Tim Phillips. But despite its violation of tradition Republican orthodoxy, the global minimum tax is more in keeping with Trump’s “America First” thrust.