Bold, pro-growth tax reform reached a major milestone last week. The House and Senate each passed slightly different versions of the Tax Cuts and Jobs Act. The two versions now head to a conference committee where select lawmakers from the House and Senate will work to hammer out one unified bill that can become law before the end of this year. They are working on a tight timeline, with only about two weeks left in the congressional schedule.
Policies in both bills would greatly improve our current, woefully out-of-date tax code. Independent analyses estimate that the economy could be almost 3 percent larger at the end of ten years, thanks to the pro-growth policies incorporated in the legislation. Even the notoriously conservative government scorekeepers predict that tax reform will boost the economy.
A bigger economy means more jobs and higher wages for working Americans. A 3 percent larger economy translates to more than $4,000 dollars per household, per year. American families could finally get a real raise.
So what, specifically, is there to like in these bills?
If you’re a middle-class taxpayer, tax rates are lower, the standard deduction is doubled, and the child tax credit is increased—to $1,600 in the House version and $2,000 in the Senate’s.
Under the current tax code, a married couple with combined earnings of $75,000, three dependent children and a home mortgage, pay $1,753 each year in federal income taxes. Heritage Research Fellow Rachel Greszler calculated that, under the “House’s tax plan, their tax bill would decline by $1,033 or 59 percent (to $720). Under the Senate’s plan, their bill would be reduced by $2,014 or 115 percent (to $0 plus a refundable credit of $261).”
Families across America can expect a tax cut.
If you’re a working taxpayer, in addition to a tax cut, your employer will be able to expand its operations and upgrade equipment. Other businesses will be doing the same. All this economic growth increases the need—and the competition among employers—for more workers. The result: higher wages, better benefits or both for you and other workers.
Both bills would cut the corporate tax rate to 20 percent—down from the current 35 percent rate, which is one of the highest corporate tax rates in the world. Family-owned and small businesses that pay their taxes as individuals will also see a new special tax cut.
Moreover, all businesses will also be able to immediately write off the costs of new equipment for five years or more. This provision, called “expensing,” lets businesses invest more in America and supercharges the pro-growth benefits of the new lower tax rates.
Many tax subsidies are also on the chopping block. Rather than have your tax dollars prop up commercially unviable industries, this reform allows the marketplace—i.e., you, the consumer—to decide which products and services merit your support.
The House and the Senate both reduce the federal deduction for state and local taxes, only allowing a $10,000 property tax write-off. This change is a true structural reform—one that President Reagan tried to make in 1980, only to be thwarted by lobbyists for big spending state and local politicians.
Removing the state and local tax deduction ends the current economically destructive subsidy whereby similar taxpayers in low-tax states pay higher federal taxes than those high-tax states. The deduction subsidizes big government and high-income taxpayers at the expense of the rest of America.
Both bills also eliminate a current subsidy to domestic manufacturing, in favor of lower rates for all types of businesses. The House bill eliminates even more special carve outs and tax subsidies. For example, they repeal subsidies for sports stadiums, student loans, historic rehabilitation, energy production and certain drug research. Lawmakers should adopt these provisions in the final package.
So where do the bills fall short?
Neither plan lowers personal taxes as far as it should. The House plan reduces the number of tax brackets from the current seven down to four, but does not lower the current top tax bracket of 39.6 percent. The plan actually raises marginal rates on some taxpayers making over $200,000 and includes a new “bubble tax rate” of 45.6 percent for high-income earners.
The Senate bill improves the House bill by lowering marginal income tax rates for a larger share of Americans, but it still does not lower rates enough to fully compensate many upper-middle-class taxpayers who will lose many of their deductions.
The final unified bill should include the House’s full repeal of the estate tax and full repeal of the personal and corporate alternative minimum taxes—both of which the Senate neglected to repeal.
Due to Senate budget rules, some of the reforms in the upper chamber’s bill are set to expire years down the road. The good news is that these expirations give Congress an incentive to revisit the tax code in the coming years and finish the work they are just now beginning. That means that they can further cut taxes for individuals and extend and make permanent any of the temporary provisions.