Trump's Tax Plan and How It Would Affect You

How the Senate Tax Bill Differs from the House Bill

Trump tax plan
Sen. Rob Portman (R-OH) speaks to reporters about the proposed Senate Republican tax bill at US Capitol on November 14, 2017 in Washington, DC. Photo by Mark Wilson/Getty Images

On November 16,  2017, the U.S. House of Representatives passed its version of the Tax Cuts and Jobs Act. That same day, the Senate Finance Committee approved its version. Both are based on the Trump administration's plan presented on September 27, 2017.

The Senate plan cuts the corporate tax rate from 35 percent to 20 percent, but not until 2019. The House plan does so in 2018. Both plans cut income tax rates, double the standard deduction, and eliminate personal exemptions.

 

On November 14, 2017, the Senate added a repeal of the Obamacare tax on those who don't get health insurance. The CBO estimates 13 million people would drop health insurance. The federal government would save $338 billion by not having to pay their health insurance subsidies. But health care costs will rise because fewer people will get preventive care. Premiums for everyone else would rise 10 percent. Trump asked Congress to use the savings to lower the top income tax rate to 35 percent. But the White House agreed the repeal could be omitted if necessary to pass the bill. Some senators suggest passing the Murray-Alexander health reform bill before voting on the tax plan to offset premium increases.

On November 15, 2017, the Senate added a measure to allow oil drilling in the Arctic National Wildlife Refuge. It would add $1.1 billion in revenues over 10 years. But drilling isn't cost effective until oil prices reach $70 a barrel.

 

Here's a summary of how both tax plans change income taxes, deductions for child and elder care, and business taxes. The Trump administration believes the final bill will look more like the Senate plan. 

Income Tax Brackets

The Senate plan keeps the current seven income tax brackets but lowers some tax rates.

These rates will revert to the current rate in 2025. Until then, it creates the following tax chart.

Income Tax RateIncome Levels for Those Filing As:
CurrentSenateSingleMarried-Joint
10%10%$0-$9,524$0-$19,049
15%12%$9,525-$38,699$19,050-$77,399
25%22.5%$38,700-$59,999 $77,400-$119,999
25% - 28%25%$60,000-$169,999$120,000-$389,999
33%32.5%$170,000-$199,999$390,000-$449,999
33% - 35%35%$200,000-$499,999$450,000-$999,999
39.6%38.5%$500,000+$1M+

The House plan reduces the number of tax brackets to four and lowers rates. It creates the following chart.

Income Tax RateIncome Levels for Those Filing As:
CurrentHouseSingleMarried/Joint
10-15%12%$0-$44,999$0-$89,999
25-28%25%$45,000-$199,999$90,000-$259,999
28-39.6%35%$200,000-$499,999$260,000-$999,999
39.6%39.6%$500,000+$1M+

Both tax plans eliminate itemized deductions except for those for charitable contributions, mortgage interest, property taxes, and retirement savings. Current mortgage-holders aren't affected by either plan.  The House plan limits the deduction up to $500,000 for new mortgages. That would affect just 6 percent of mortgages, mostly in large cities.  The Senate plan allows the deduction to remain up to $1 million but eliminates it for home equity loans.

The House plan eliminates the deduction for medical expenses.  Currently, people can deduct medical expenses that are 10 percent or more of income. It was used by 8.8 million people in 2015. The Senate plan keeps that deduction.

Both plans eliminate the deduction for state and local taxes. That would hurt 44 million people, primarily residents in high-tax states like California and New York. It would add $1.3 trillion to federal revenues. The House plan allows taxpayers to deduct state property tax deductions up to $10,000. The Senate plan allows businesses to deduct state and local taxes.

Both eliminate deductions for interest payments on school loans, moving expenses, theft or loss of valuable, and electric vehicles. The New York Times further details every tax cut and increase in the House bill.

Both plans double the standard deduction for everyone. A single filer's deduction increases from $6,350 to $12,000. The deduction for Married and Joint Filers increases from $12,700 to $24,000

Both plans eliminate personal exemptions. The exemption currently allows taxpayers to subtract $4,050 from income for each person claimed on the tax return. Families with many children would pay higher taxes despite the increased standard deductions. For example, a married couple with two children making $56,000 a year would pay $68 a year more

Both plans double the estate tax exemption. Current tax law for 2018 exempts the first $5.6 million for singles and $11.2 million for couples. The House plan repeals the estate tax and the generation-skipping transfer tax as of January 1, 2024. That would help the top 1 percent of the population who pay it. That's 4,918 tax returns, but they contribute $17 billion in taxes.

Both plans eliminate the Alternative Minimum Tax. That helps those who make enough to be subject to it. In 2017, the AMT could affect those with incomes above $54,300 (single) or $84,500 (married filing jointly). 

Child and Elder Care Deductions 

The Senate plan increases the Child Tax Credit from $1,000 to $2,000. It also increases the income level from $110,000 to $1 million. The House plan raises the Credit to $1,600.  Both plans preserve the adoption tax credit. The Senate plan allows parents to set aside money for their unborn child in a tax-advantaged account.

The House plan eliminates the marriage penalty as it relates to the Child Tax Credit. Under the current tax system, two single parents receive the full credit up to a combined income of $150,000. But the credit shrinks for a married couple after they earn $110,000. Research shows that subsidizing child care encourages people to work. That boosts income and economic growth.

The House plan allows a $300 credit for each non-child dependent that sunsets in five years. Trump's 2016 plan gave a permanent $5,000 deduction for elder care.  

Business Taxes

Both plans lower the maximum corporate tax rate from 35 percent to 20 percent. The Senate plan delays the change until 2019. It delayed the tax cut to save $100 billion in revenue loss.The United States has one of the highest corporate tax rates in the world. But that doesn't hurt large corporations. Most of them don't pay more than 15 percent. That's because they can afford tax attorneys who help them avoid paying more. 

Both plans lower the maximum small business tax rate to 25 percent. The House plan reduces the rate to 9 percent on the first $75,000 in income on businesses that make $150,000 or less. That phases in until 2022. That includes sole proprietorships, partnerships, and S corporations. Many of those are real estate companies, hedge funds, and private equity funds.

The Senate plan's reduced rate doesn't apply to labor-intensive firms like lawyers and financial services that make more than $75,000 a year. It also eliminates the deductions for supplies, home office costs, and legal fees. But it adds a 17.4 percent standard deduction.

Both plans allow businesses to expense the cost of depreciable assets instead of writing them off over the years. It does not apply to structures. This feature expires in five years. The write-off would encourage more investment. 

Under the House plan, C corporations lose the ability to deduct interest expense. That makes it more expensive for financial firms to borrow money to lend and invest. Companies would be less likely to issue bonds and buy back their stock. That could cause stock prices to fall. But the repeal would generate $1.5 trillion in revenue to pay for other tax breaks.

On November 6, the House increased taxes on carried interest profits. It's taxed at 23.8 percent instead of the top 39.6 percent income rate. Firms must hold assets for a year to qualify for the lower rate. The House plan extends that requirement to three years. That might hurt hedge funds that tend to trade frequently. It would not affect private equity funds that hold onto assets for around five years. Trump campaigned on making them pay their fair share. The change would raise $1.2 billion in revenue.

Both plans advocate a "territorial" tax system. It doesn't tax income that businesses earn in other countries. But it does impose a 10 percent tax on high-profit foreign subsidiaries. Businesses can repatriate cash stockpiles for a one-time low tax rate. That may encourage companies to put that cash to work.The Senate plan's tax rate is 10 percent on cash and 5 percent on illiquid assets. The House plan charges 7 percent and 14 percent, respectively. Trump's Five-Part tax plan charged 10 percent.

The goal is to encourage companies to repatriate $2.6 trillion in foreign cash. They've hoarded it to avoid paying taxes. But the Congressional Research Service found that a 2004 tax holiday provided little boost to the economy.  Companies distributed repatriated cash to shareholders, not employees.

Trump's Promises No Longer in the Plan

Trump's 2016 plan allowed up to $2,000 to be deposited tax-free into a Dependent Care Savings Account. That allows earnings to grow tax-free to pay for a child's education at age 18. Taxpayers who were eligible for the Earned Income Tax Credit receive a rebate. They could use that rebate for the DCSA. 

Trump had also promised to end the ACA tax on investment income. 

How It Affects You

The Senate plan would help businesses more than individuals. Through 2027, all business taxes would be lower. But individual taxes at every income level would increase by 2027. 

Among individuals, it would help higher income families the most. Everyone gets a tax cut in 2019. But in 2021, taxes will increase on those making $30,000 or less. By 2023, taxes will rise on everyone who makes less than $40,000 a year. The tax cuts expire in 2025. As a result, all income levels will pay higher taxes in 2017. The tax increases are due to loss of deductions. That's according to the most recent analysis of the Senate plan by the Joint Committee on Taxation.

There are 6 million taxpayers who will benefit from the increased standard deduction. That's a total of 47.5 percent of all tax filers, according to Evercore ISI. But that's not enough to offset lost deductions.

The House bill is slightly better.  The Tax Policy Center estimated only 31 percent of middle-class households would pay higher taxes by 2027. 

Neither plan helps the lowest-income families. That's because more than 70 million Americans don't make enough to pay taxes. The plans also don't help the third of taxpayers who have incomes that fall below current standard deduction and personal exemptions, according to New York University law professor Lily Batchelder

Both plans increase the deficit by almost $1.5 trillion over the next 10 years as allowed by the FY 2018 budget. Budget-conscious Republicans have done an about-face. The party fought hard to pass sequestration. In 2011, some members even threatened to default on the debt rather than keep adding to it. Now they say that the tax cuts would boost the economy so much that the additional revenues would offset the tax cuts. They ignore the reasons why Reaganomics would not work today.

Furthermore, some tax breaks, like those for non-child dependents, end in five years. But House leaders admit that a future Congress will probably extend it, thus adding more to the national debt. If it isn't extended, then some middle-income taxpayers will see their taxes rise after 2023.

The Penn Wharton School of Business said the House plan would increase the $20 trillion debt by $2 trillion over its first 10 years. That includes $500 billion in additional interest on the debt. The Wharton study said the House plan would boost growth by 0.4 percent and 0.9 percent in its first 10 years. But it might not improve growth at all in the subsequent 10 years.

The Tax Policy Center had said that Trump's Unified Tax Reform Framework would increase the debt by $7 trillion over its first 10 years. Any boost in growth was offset by increased interest on the debt. 

Increase in sovereign debt dampens economic growth in the long run. When a country's debt-to-GDP-ratio is more than 100 percent, investors get concerned. They demand higher yields on the nation's bonds, increasing interest rates. Those higher rates slow growth. 

The administration believes in supply-side economics. It  says companies will use tax cuts to create jobs. It worked during the Reagan administration because the highest tax rate was 70 percent. According to the Laffer Curve, that's in the prohibitive range. The range occurs at tax levels so high that cuts boost growth enough to offset revenue loss. But trickle-down economics no longer works because the 2017 tax rates are half what they were in the 1980s. 

The most most significant tax cuts should go to the middle class who are more likely to spend every dollar they get. The wealthy use tax cuts to save or invest. It helps the stock market but doesn't drive demand. Once demand is there, then businesses create jobs to meet it. Middle-class tax cuts create more jobs. But the best unemployment solution is government spending to build infrastructure and directly create jobs.

Next Steps

The Senate plan must fulfill two requirements to pass the Senate with a 51-vote majority.  First, it can't add more than $1.5 trillion to the debt in the first 10 years. Second, the Byrd rule prohibits it from adding anything to the debt after the first 10 years. The current version already violates that. If the Senate bill doesn't pass those two rules, it requires a 60-vote majority to pass. Then the plan is dead. Democrats won't support a bill that benefits the rich more than the poor. 

The Senate bill is already in trouble. Senator Ron Johnson, R-Wis., opposes the bill because it doesn't do enough for small businesses. Senator Susan Collins, R-Maine, is concerned that eliminating the mandate to buy health insurance will raise premiums for everyone else. Senators Jeff Flake, R-AZ, and Bob Corker, R-Tenn, are concerned about the deficit impact.

The Senate will vote on its plan after Thanksgiving. If approved, then House and Senate leaders have a month to reconcile the two plans in a conference committee. The Senate cannot approve the House bill as its currently stands because it violates the Byrd Rule. The House doesn't want to approve the Senate's elimination of the deduction for state and local taxes. 

If the conference committee reconciles the two versions, Congress votes on the final bill. Leaders want to send it to the president before Christmas. That's a very ambitious deadline. Typically that process would last until January 2018.

The National Association of Home Builders and the National Association of Realtors oppose increasing the personal deduction and reducing the mortgage deduction. As more taxpayers take a standard deduction, fewer would take advantage of the mortgage interest deduction. That would lower housing prices. This could be a good time to do that, since many people are concerned that the real estate market is forming a bubble that could lead to another collapse.

AARP opposes the elimination of the medical expense deduction. That hurts seniors the most, since they are more likely to have chronic illnesses or be in nursing homes.

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