Republicans’ effort to reform the U.S. tax system took a big step forward early Saturday morning, when the Senate passed its version of the Tax Cuts and Jobs Act.
The GOP’s Senate tax bill, which passed in a close party-line vote, could give President Donald Trump his first legislative victory after Congress failed to overhaul the nation’s health system earlier this year.
It’s too early to tell precisely how the GOP tax plan would affect individual taxpayers. That’s because, in an effort to muster votes, Republicans continued tinkering with the tax bill behind closed doors up until a few hours before it actually passed, and the economists who typically crunch the numbers on new legislation haven’t had time to examine the tax bill’s results.
All the same, the broad outlines — the Senate tax bill’s big winners and losers — have been known for weeks.
Indeed, while perhaps falling short of the Reaganesque, once-in-a-generation remaking of the tax code — which President Trump had promised — the Senate tax bill will mean tax cuts for millions, especially business owners and other top earners.
Like the House tax bill, passed earlier this month, the Senate version is largely built around reorganizing and lowering what corporations and other businesses pay in taxes in hopes of spurring economic growth. That said, middle-class Americans could be able to count on a tax cut too, at least during the next few years — assuming, that is, that the Senate bill can be reconciled with the House version and become law.
Here is what you need to know:
You’ll probably see a tax cut, but maybe only in the short term.
Trump campaigned on a promise to cut middle-class taxes. And the Senate is delivering — sort of. One analysis of the tax plan, conducted on a preliminary Nov. 20 version of the bill by the Tax Policy Center, a centrist think tank, found the average middle earner (someone taking home about $50,000 to $90,000) would reap an $850 tax break in 2019, benefiting in part from a standard deduction that would double to $12,000 for singles and $24,000 four couples.
But there are some big catches. For one, the Senate bill doesn’t just slash rates across the board. In addition to lowering rates, it rejiggers many aspects of the tax code to simplify rules and keep lost government revenue to a minimum. Another preliminary analysis, this one by The New York Times, defined middle-class earners as those making $40,000 to $140,000 — and found that many of those, particularly the people that rely on the state and local tax deduction, could actually see a tax increase next year.
One wild card: The Times analysis doesn’t appear to include a carveout that was included at the last minute, at the instance of Maine’s Sen. Susan Collins. Collins’ amendment, which would allow taxpayers to continue to deduct up to $10,000 in property taxes, would likely soften the blow for at least some of these middle-income taxpayers.
Another issue for middle-class earners: For most of them, the benefits of the tax cuts are also likely to be temporary. That’s because with a bare 52-seat majority and no Democratic support, Republicans couldn’t write a tax bill that would blow up the deficit in the long term. As a result, individual rate cuts expire in 2026. The bill also uses a new way to account for inflation, which could push some taxpayers into higher brackets.
By 2027, savings for the average taxpayer earning roughly $50,000 to $90,000 will have shrunk to just $50, the Tax Policy Center found.
The main focus of the tax bill is business.
Republicans’ stated goal is to boost the economy. They argue that the best way to do this is to cut the taxes that businesses pay on profits, allowing companies to reinvest the money in new equipment and workers. In fact, the Senate bill centers on provisions to permanently cut the corporate tax rate — the rate paid directly by companies like Apple or Ford Motor — to 20% (from a top rate of 35%) starting in 2019, while also allowing a new deduction for individual taxpayers who own their own businesses.
The Tax Foundation, a right-leaning think tank, said earlier this month that it expected such provisions to boost U.S. economic growth by about 0.26 percentage points a year over the next decade. (The Tax Foundation’s optimistic view is controversial, but more on that later.)
The rich will see the biggest tax cuts.
Business owners tend to be wealthy — whether their assets take the form of stock holdings or privately owned ventures. The upshot is that the Senate tax plan’s benefits skew dramatically toward top earners.
According to the preliminary Tax Policy Center analysis, the top 1% of earners — those taking home more than about $900,000 a year — were set to reap about 60% of the total tax cut, for an average of more than $32,000 annually apiece. The top 0.1% — those earning $5 million or more — were to get an extra $200,000.
Everyone agrees the Senate tax bill will expand the deficit.
During the campaign Trump promised a tax cut that would be “revenue neutral.” The idea was that, while government receipts might initially fall when rates were cut, economic growth would boost American’s incomes enough to replace the lost revenue despite the lower rates.
While some politicians have continued to make this claim, the vast majority of independent experts are skeptical. That’s one big reason that Republican deficit hawks were some of the bill’s last holdouts. Even accounting for economic growth, the Senate plan will add about $1 trillion to the debt over the next decade, according a report from non-partisan Joint Committee On Taxation released Thursday.
Whether the tax plan is good for you depends on how the economy responds.
The stated goal of tax reform is improving the economy, and the right-leaning Tax Foundation predicted in November that the bill (as it stood at the time) could ultimately help the U.S. add almost a million new jobs over the next decade.
But economists are divided about whether that growth will in fact play out as hoped. A key factor here is what happens to interest rates, which have remained near historic lows even as the national debt has climbed steadily since the financial crisis.
Many economist believe that piling still more debt on top of what the government already owes — currently $14 trillion — could eventually lead investors to sour on U.S. bonds. The result would be higher interest rates, which would push up borrowing costs for everyone from the government itself to most U.S. businesses. That in turn could choke off whatever extra growth the tax cuts spurred in the first place.
The Tax Foundation tends to see rates remaining low, even as the deficit increases — hence its rosy job forecast. But many economists disagree. Earlier this month, researchers at the University of Pennsylvania estimated the tax cut could add as little as 0.03 to 0.08 percentage points to annual GDP growth over the next decade, which would presumably bring far fewer jobs.