What is In the New Tax Bill?

Some are finding the recently passed Republican Tax Cuts and Jobs Act laffable.

Sorry, couldn’t help the play on the name of Arthur Laffer, the supply-side economist and developer of the Laffer Curve, whose theories inspired massive tax cuts during President Ronald Reagan’s first term in office. In short, supply-side economics maintains that lower taxes spur economic growth.

Word is still out on whether supply-side economics work. A U.S. Treasury Department analysis of the impact of George W. Bush-era tax cuts in 2001 and 2003 found the cuts provided a short-term boost in a weak economy. But other economists attributed gains to lower interest rates, not the tax cuts.

The one thing nearly everyone agrees on is that politicians who promote supply-side tax cuts as a certain way to raise revenues misinterpret the Laffer Curve.

The main problem with supply side economics – and this is exactly what Republicans hang their hat on with this bill – is the very large assumption that the compassionate patriotism of the country’s CEOs will cause them to use the tax cuts to reinvest in their businesses, thereby creating more jobs and growing the economy.

But many CEOs have said they plan not to reinvest, but to increase stockholder dividends, buy back stock, or invest overseas.

So, in the very speculative area of economics, where the view depends on your perspective, what will this new tax bill mean to you?

According to the nonpartisan Tax Policy Center (TPC), it will mean very much if you are in the top-earning bracket, and not so much if you’re an average Joe.

The TPC analysis found that taxpayers earning in the top 1 percent would receive a larger percent tax cut than those in lower income levels. Those who earn more than $733,000 can expect a $50,000 tax cut.

By 2027, those in the lowest 20 percent would pay higher taxes. The TPC estimated the bill would impose higher taxes on 31 percent of middle-class households in 2027. Of course, our current lawmakers anticipate the legislators of the near future will bail out those middle class taxpayers when the time comes.

Here are a few of the changes in the tax bill:

• The corporate tax rate is reduced from 35 percent to 21 percent, the lowest it has been since 1939. (Most corporations have tax lawyers who help them avoid paying higher than 15 percent.)
• The standard deduction is doubled across the board. A single filer’s deduction goes from $6,350 to $12,000. For married and joint filers, it increases from $12,700 to $24,000, reverting back to the current deduction level in 2026.
• Medical expense deductions of 7.5 percent or more of income are allowed. The current medical expense deduction stands at 10 percent or more of income.
• Most itemized deductions are eliminated. However, deductions for charitable contributions, property taxes, mortgage interest and retirement savings remain, although the mortgage interest deduction is limited to the first $750,000 of the loan.
• Those paying alimony will lose that as a deduction, and beginning in 2019, those receiving alimony will not be taxed on that income.
• Interest on home equity lines of credit can no longer be deducted, but it will not affect current mortgage holders.
• The individual mandate, a provision in the Affordable Care Act that imposed a tax on individuals who do not have insurance, is repealed. It does not go into effect until 2019.
• The estate tax exemption is doubled, from $11.2 million for singles and $22.4 million for couples. It reverts to current levels in 2026.
• The Child Tax Credit is doubled to $2,000.
• A $500 credit is allowed for each non-child dependent to help families caring for elderly parents.
• Education Secretary Betsy DeVos’ private school agenda got a big boost by opening the 529 college savings plan for private K-12 school tuition. Parents can withdraw up to $10,000 annually tax free from a 529 savings account to use for “public, private or religious elementary or secondary school” expenses.
• The act allows oil drilling in the Arctic National Wildlife Refuge, which drafters say would add $1.1 billion in revenues in 10 years. Critics say drilling in the refuge won’t be profitable until oil prices are at least $70 a barrel (they are selling for around $50 a barrel).
• Federal and private student loan debt discharged from death or disability will not be taxed from 2018 through 2025.
• With the doubling of federal estate-tax exemptions from 2018 through 2025 – from $5.49 million to $11 million for individuals and from $10.98 million to nearly $22 million for married couples – there is some speculation about whether there will be decreased use of life support machines by the wealthy through December 2025.

NEW INCOME TAX RATES

If you earn:

• $0 to $9,525 (single) or $0 to $19,050 (married): Tax rate remains 10 percent.

• $9,525-$38,700 (single) or $19,050-$77,400 (married): Tax rate drops from 15 percent to 12 percent.

• $38,700-$82,500 (single) or $77,400-$165,000 (married): Tax rate drops from 25 percent to 22 percent.

• $82,500-$157,500 (single) or $165,000-$315,000 (married): Tax rate drops from 28 percent to 24 percent.

• $157,500-$200,000 or $315,000-$400,000 (married): Tax rate drops from 33 percent to 32 percent.

• $200,000-$500,000 (single) or $400,000-$600,000 (married): Tax rate now is 33 percent to 35 percent; bill would set it at 35 percent.

• $500,000-plus (single) or $600,000-plus (married): Tax rate drops from 39.6 percent to 37 percent.