The big tax code makeover President Trump and Republicans have been promising for months is finally out.
Here are the key takeaways:
- The plan will likely add to America's $20 trillion debt. There are lots of tax cuts spelled out. There are almost no loopholes eliminated.
- The rich make out pretty well. The White House vows poor people won't have to pay more than they do now, but there are few specifics in the plan so far to ensure that.
- Businesses (both small and large) get major tax cuts.
- Most people will pay lower taxes, although it's unclear if the rich get a bigger break than the middle class.
- There are still a lot of details Congress has to figure out.
What's in there for the rich?
The wealthy get a tax cut. They will pay only 35 percent on their income taxes (down from 39.6 percent). At the moment, this rate applies to any income above about $418,000. It's unclear if Congress will tinker with the income level that rate kicks in at. Trump says he would be fine with Congress raising taxes on the rich in the final plan, but he isn't requiring that they do that.
The bigger tax break for the rich is the elimination of the estate tax, sometimes called the “death tax.” It's the tax families currently pay when an asset like a house or ranch worth over $5.49 million is passed down to a heir after someone dies. Trump's plan scraps this tax entirely.
What's in there for the middle class?
This is the giant question mark. There's a lot of details left for Congress to fill out. Under the plan, America will have just three tax rates: 35, 25 and 12 percent, but we don't know yet which rate someone earning $50,000 or $80,000 will pay.
What we do know is the standard deduction (currently $6,350 for individuals and $12,700 for married couples) will nearly double. This means that a married couple earning $24,000 or less or an individual earning $12,000 or less won't pay any taxes. But the plan also eliminates what's known as the additional standard deduction and the popular personal exemption. Some filers may end up worse off after these changes.
The plan also promises a “significant increase” to the child tax credit (it's currently $1,000 per child) and that middle class Americans can keep using the mortgage interest deduction as well as tax breaks for retirement savings (e.g. 401ks) and higher education. But it eliminates the state and local tax deduction, which is used by many in high-tax states like New York and California.
Can I really file my taxes on a postcard?
The “file on a postcard” idea was an exaggeration. The goal now is to get most people's tax returns down to one page.
What about the working poor?
A senior White House official told journalists Tuesday, “We are committed to making the tax code at least as progressive as the current tax code.” Translation: The poor should not end up paying more than they do now. But it's hard to check if that's true because we still don't have enough details.
In theory, increasing the standard deduction should mean that more Americans pay $0 in taxes, but it depends what happens to a lot of other tax provisions (and whether Congress ends up cutting safety net programs that help the poor to pay for tax cuts). Top Republican officials have not decided what to do with the Earned Income Tax Credit (EITC), which is widely used by the working poor to help them reduce their tax bill and even get a small amount of money back from the government.
What happens to the Alternative Minimum Tax?
The Alternative Minimum Tax (AMT) would go away under the plan. It currently applies mainly to individuals earning more than $130,000 and married couples earning more than $160,00. It was created in the 1970s to prevent wealthier families from taking so many tax breaks that they end up paying little to no taxes, but over the years, the AMT has impacted more and more families.
What happens to big businesses?
America's large corporations will get a big tax cut. The top rate at the moment is 35 percent, one of the highest rates among developed nations. Most U.S. companies don't pay that rate, but it is still a starting point. The Trump plan slashes the rate to 20 percent, just below the average of major developed countries the U.S. competes against.
The White House and Congress promised to close some loopholes that businesses currently enjoy, but no one is saying what those are yet. In fact, the only details we have show MORE business goodies, not less. The plan calls for businesses to be able to write off their investments (e.g. the cost of building a new factory) right away instead of crediting a little bit each year for several years. This is supposed to encourage companies to invest more, which will hopefully create more jobs.
What happens to small businesses?
Small businesses also get a tax cut under the plan. At the moment, many small business owners pay whatever their personal income tax rate is, so some end up paying as much as 39.6 percent. Under this plan, most “pass throughs” (code for small businesses) would pay at the 25 percent rate (the exception is if a small businesses earned very little income, they might be able to pay at the 12 percent rate).
There's concern some rich people, especially hedge fund managers and consultants to the stars, will simply use this as a way to lower their tax bill. Instead of paying at the new 35 percent top income tax rate, they could say all their income is small business income and pay at the 25 percent rate. Trump has promised to fix that problem, but no one is sure how.
How will this plan help growth?
Trump's big claim is that this tax overhaul will unleash economic growth. The United States has been growing at about 2 percent a year lately, below the historic norm. Trump keeps saying this plan will unleash growth of 3 percent — or more.
Economists, even those who work at Wall Street banks and for big companies, only project a modest boost to growth. Estimates range from 2.1 percent to 2.25 percent.
How much will this add to the debt?
Originally, Republican leaders said they would not add $1 to America's debt, but that promise appears to be gone. The White House says it will go along with whatever price tag Congress allows. Right now, Senate Republicans have a deal to add $1.5 trillion to the debt over the next decade, so there's a good chance this tax plan will add to the debt.
What are the pitfalls?
There's a ton we don't know yet. Many on the left are concerned this plan gives away too much to the rich and big businesses. Many across the political spectrum are alarmed that it will likely add to America's already large debt.