House Republicans have unveiled their tax reform bill — a 400-page overhaul of the nation’s tax code that will radically cut the corporate tax rate, double the standard deduction, and consolidate the individual tax rates.
After months releasing vague outlines and broad plans, and a week of late-night negotiation sessions between members of the tax-writing Ways and Means Committee, House Republicans released their bill Thursday morning — one day after they initially said they would.
The bill reduces the corporate tax rate to 20 percent from 35 percent, expands the child tax credit from $1,000 to $1,600, and caps the state and local property tax deduction at $10,000. It leaves retirement savings accounts unchanged and reduces the tax rate for small businesses to 25 percent.
As Vox’s Dylan Matthews explained, the bill in its current form “would almost certainly give disproportionate benefits to wealthy Americans,” who are more likely to benefit from corporate tax cuts than nonwealthy Americans. And by consolidating individual income rates, people earning between $400,000 and $1 million would see a significantly lower top income tax rate.
Overhauling the nation’s tax code comes with a lot of winners and losers, and as Obamacare repeal already showed, Republicans can’t just expect their members to fall in line on a major agenda item. The party is unified in their goal to cut taxes, but has been struggling within its ranks over how deeply to lower rates and whether to pay for the tax cuts.
Here are two winners and three losers from the House Republicans’ opening tax reform bid.
Winner: corporate America
A centerpiece of the Republican tax plan is giving corporations a massive tax cut. The bill proposes permanently cutting the corporate tax rate from 35 percent to 20 percent to bring it closer to that of countries like Canada, which has a 15 percent corporate tax rate, or Ireland, which has a 12.5 percent corporate tax rate.
“It’s in all of our best interest to have these tax cuts for corporations so that they will have more money to invest in their business and pay their workers,” Rep. Mike Conaway (R-TX) told Vox Wednesday.
But this is mostly a false premise. The Center on Budget and Policy Priorities, pulling together assessments from the Congressional Budget Office, the Joint Committee on Taxation, the Tax Policy Center, the Treasury’s Office of Tax Analysis, and the Institute on Taxation and Economic Policy, found that workers would only receive a quarter or less of the benefits from tax cuts — and among those workers, it’s likely the higher earners that would benefit.
President Donald Trump and congressional Republicans have been pushing hard on the 20 percent corporate tax rate — according to White House press secretary Sarah Huckabee Sanders, it’s what Trump is referring to when he claims the United States is one of the highest-taxed nations in the world.
While it’s true that the United States’ corporate tax rate is exceptionally high on paper, the actual rate that corporations currently pay is much lower than 35 percent.
“Our corporate tax code is riddled with loopholes, and what corporations pay is far, far lower — somewhere between 13 and 21 percent,” Hunter Blair, a tax and budget analyst at the left-leaning Economic Policy Institute, told Vox. The Congressional Budget Office puts the United States’ current effective corporate tax rate at 18.6 percent, lower than that of countries in Europe and Asia.
While the Republican bill closed some of these smaller loopholes, many of the major ones remain intact, making this massive tax cut into a bonanza for corporate America.
Loser: fiscal conservatism
The corporate tax cut, along with the bills other proposals, is expensive. The Tax Policy Center estimates the corporate tax alone would cost about $2 trillion over 10 years — a substantial impact on the deficit.
You’d expect conservatives who have spent their careers decrying the dangers of the national debt to shudder at such an estimate. But not so much.
Fiscal conservatives and deficit hawks seem to have changed their tune, all in the name of massive tax cuts that would primarily benefit the wealthy.
“Sometimes you have to go into a little bit of debt to make your business stronger,” Rep. Jim Renacci (R-OH) said when the House was passing the budget, which gave Republicans a green light to go ahead with a partisan tax reform bill.
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. Ways and Means Chair Rep. Kevin Brady (R-TX) said he expects this proposal to cost $1.51 trillion.
But there’s some dubious math that goes into that calculation, including a very rosy calculation for economic growth and sunsetting various programs like full expensing of investments and the $300 filer credit expires after five years, which is likely to reduce the deficit impact — which could be masking upward of a $1 trillion in future costs. Rep. Mark Sanford (R-SC) has long cautioned against assuming a high rate of economic growth.
Some fiscal hawks in the Senate have likewise signaled concern. Sen. Bob Corker (R-TN) says he will not vote for a tax plan “adding one penny to the deficit” — although he left some wiggle room on what he will consider as a reasonable economic growth projection.
After the House released its proposal, Sen. Jeff Flake (R-AZ), who has long been a fiscal conservative, tweeted that Republicans had to pass “real” tax reform and take the debt seriously.
But as for the conservatives in the House, fiscal conservatism is a thing of the past. Tax cuts are in.
Winner: Donald Trump, personally
There are several proposals in this plan that would directly benefit President Trump’s family.
Currently, owners of “pass-through” companies, like LLCs, partnerships, sole proprietorships, and S corporations — the Trump Organization, for example — are taxed as personal income. The Republicans proposal offers a new low tax rate for owners, at 25 percent, a substantial cut from what is typically taxed at 36.9 percent.
The Trump Organization is a large pass-through; it owns golf courses and hotels and pulls in about $9.5 billion in annual revenue. But because it is exempt from the corporate income tax, and its profits are instead taxed upon distribution to shareholders, this new low pass-through rate is a huge win for the Trump family — and the many other businesspeople who structure their companies like this.
As Matthews explained, there are some provisions in the proposal meant to prevent rich individuals from using this tax break as a way to shelter income, but they only limit the benefit in many cases.
“The overwhelmingly rich owners of these companies will still come out way ahead,” he writes.
Another provision in this bill would also directly benefit Trump’s family. While most companies would have a new limit on interest deductions — capped at 30 percent of earnings before interest and taxes — real estate firms and small businesses would be exempt.
For more on this, Vox’s Alvin Chang and Javier Zarracina explain how this “pass-through” tax break works in favor of people like Trump in a cartoon, which is a much more fun way to read about pass-throughs and taxes.
Loser: the bottom 35 percent of taxpayers
There’s a lot in this tax bill that helps the wealthy.
The benefits from corporate tax cuts will most likely go to shareholders and high earners in the company. People earning between $400,000 and $1 million would face a significantly lower top income tax rate, at 35 percent, instead of the 39.6 percent rate that has not been changed for those making more than $1 million annually. And the bill proposes phasing out the estate tax, which benefits the wealthy.
But there’s not a lot in this bill that helps the lowest-income Americans.
People living in more expensive states and cities would likely end up paying higher taxes, because the Republican proposal eliminates the state and local income and sales tax deduction and caps the property tax deduction at $10,000.
And the poorest families, whose incomes are lower than the standard deduction, won’t be getting any help, according to Lily Batchelder, a professor of law and public policy at New York University and former senior counsel with the Senate Finance Committee.
As Matthews wrote, there were rumors that the lowest-income families would be getting a tax cut due to a change in the refundability formula for the child tax credit. But that wasn’t in the bill.
Losers: people with big medical expenses, homebuilders, Californians
To pay for the tax cuts, Republicans slashed some smaller deductions that could still have a major impact on households.
The bill repeals the medical expense deduction, which currently allows Americans to deduct qualified medical expenses that cost more than 10 percent of their adjusted gross income. This can include surgeries, ongoing treatment, preventive care, and dental and vision expenses, and is a deduction typically used by people with chronic illnesses.
Repealing the deduction will save Republicans about $10 billion, that is being used to offset the other tax cuts — but it could carry a big political cost, as we saw with the health care debate just months ago.
The bill also drastically changes the mortgage interest deduction, lowering the cap for newly issued loans to $500,000 from the current $1 million threshold. This would reduce the incentive to buy and build homes, which could affect lenders, construction companies, and real estate firms.
Already the National Association of Home Builders has formally announced its opposition to this bill.
As previously mentioned, Americans in blue states are also adversely affected by this proposal. For one, the bill repeals the state and local income tax deduction and caps the property tax deduction at $10,000. Those living in states like California, which has the highest income tax but a relatively low property tax, will be particularly impacted by this change.