President Donald Trump laid out simple, key goals for tax reform because he knew the messaging needed to be clear, concise and appetizing if Republicans were going to be able to bring working families on board and claim victory in 2018. The president wanted a tax code simplified to the point that annual filings could be done on a postcard, a corporate rate of 20% and a huge tax cut for middle-income earners. But Republicans in the Senate appear to have missed the mark on all of those which will allow Democrats to point at tax cuts and simplification as failed economic policy.
The text of the Senate bill became public Tuesday and after perusing the 515-pages of amendments to the 1986 tax code, it’s clear that simplification and an immediate corporate tax cut weren’t considered critical.
Seven Tax Brackets
The Senate’s plan keeps all seven tax brackets, despite Trump’s request to drop it to three. The following table illustrates the break-down for married filers:
So if both earners, filing jointly, each make $40,000/year, they’ll have to evaluate the first four lines of that table then add the products together to understand their tax liability. That’s what they have to do today!
The only real simplification is the removal of miscellaneous deductions like moving expenses or unreimbursed employee expenses.
Alternative Minimum Tax
The alternative minimum tax is fully repealed for corporations but only suspended until 2027 for individuals.
Small Business Taxes
Many small and family business owners report their company’s income on their tax returns – so-called pass-through filing. Currently, those owners pay taxes on that income at their personal rate – up to 39.6%. The Senate version lowers the rate to 17.4%, but only on certain kinds of income. Having to differentiate some kinds of income from others will actually increase the complexity of pass-thru filing. Just read Robert Green’s break-down of pass-through income handling in the Senate bill and it becomes obvious that it is not simpler:
The Senate’s pass-through deduction for non-service businesses works well in all brackets, whereas, the House doesn’t seem to deliver savings in brackets under 25% ordinary rate. Furthermore, the House’s 25% PTE rate is misleading — in the 35% ordinary bracket, the blended PTE rate for an active owner of a non-service business is 32%, providing just a 3% rate savings. In my below example, the non-service business owner lowers his federal tax rate by 6% with the Senate proposal. Also, the Senate pass-through deduction could save taxes on state income tax returns (unless a state decouples from the federal rules). The House PTE rate does not deliver tax savings on state returns, just like a long-term capital gain rate is not reflected on the state level.
The Senate allows service companies to use the pass-through deduction providing they are middle-income taxpayers with taxable income under the phase-out range. The House bill provides service companies to use the PTE rate only if they have an “alternative capital percentage.” Increasingly, many service businesses invest in automation, robots, and other equipment.
Corporate Tax Rates
The corporate rate cut to 20% is delivered, but even here the Senate GOP mucked it up. While the House version delivers the lower, more-competitive rate for fiscal year 2018, the Senate bill delays it a year – after the mid-term elections. Any plus for the American economy the lowered tax rate may have created won’t be realized until after the election.
The Lose-Lose for 2018
The lack of will to push through truly generation tax reform will come back to haunt Republicans in 2018. Recent stock market gains sparked by the promise of these reforms could instantly reverse upon passage, corporation’s plans to build or expand in the U.S. could be delayed by a year as they wait for the favorable tax rate – killing GDP, and the only tax form anyone will remember filing prior to the mid-terms will be from the current tax code.
Once again, Republicans have snatched defeat from the jaws of victory. You can just hear Chuck and Nancy ahead of the 2018 elections:
“The Republicans rammed through their plan without any bi-partisan support and once again we see that trickle-down tax cuts don’t fuel the economy or help working families – trickle-down voodoo economics don’t work.”