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The 2017 Trump Tax Bill Provides Large Corporate Tax Reductions of $125 Billion And About $50 Billion Of Middle Class Tax Reductions

ArmchairPolitiicianTaxBill, January 7, 2018, by Brad Peery,

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The corporate tax reduction passed by the Congress in late 2017 will take effect on January 1, 2018, not in 2019 as proposed by the Senate.

After Trump first suggested a 15% corporate tax rate, and then 20%, a rate of 21% was included in the bill. Having a higher tax rate helped meet the requirement that the bill not raise the deficit at the end of the 10-year forecast period. It also made U.S. businesses competitive worldwide, with the worldwide corporate tax rate averaging 23%.

Important to the success of the tax bill is increasing economic growth to over 3%. However offsetting the prospects are actions by the Fed during the Obama years that kept interest rates at 0%. Also, the economy was stimulated by injecting money into the economy by building up Fed portfolio holdings to a record $4.5 trillion. The Fed is raising interest rates, with further increases expected in 2018. It is also planning to slowly sell its portfolio holdings. Both of these initiatives are likely to slow economic growth, and make it more difficult to reach 3% or higher economic growth.

Capital investment was weak during the Obama administration. It is argued that the corporate tax reductions will put more capital in the hands of businesses, and will have a “supply side” effect that will stimulate capital investment.

Missing in the final bill was the corporate alternative minimum tax. Included was a provision that allows capital equipment purchases to be immediately deducted. The bill included interest rate caps based upon EBITDA for the first four years, and then shifts to a less attractive cap based upon EBIT. Private equity companies are still allowed to treat “carried interest” as a capital gain.

The bill simplifies the tax code by eliminating some deductions, reducing others, such as the deduction of state income taxes, state property taxes and home mortgage interest deductions. Offsetting the reduction in deductions is an increase in the individual and family personal deductions, with the family deductions going from $12,000 to $24,000.

The bill included a provision that eliminated the Obama healthcare requirement that everyone must have healthcare insurance or pay a tax. This eliminates the taxes from people not wanting healthcare coverage, but required to pay a penalty. This may be offset by somewhat higher support for insurance companies providing Obamacare coverage.

Not included in the bill was the border adjustment tax that would have taxed imports, exempted exports, and raised about $1 trillion in taxes over 10 years.

ArmchairPolitician.US Opinion

Passing the Tax Reform Bill, was a challenge. The Republicans succeeded despite having only a very narrow Senate majority. They tried to get some Democrats to support the tax bill, but all voted no. Another hurdle was the almost universally negative press. President Trump deserves praise for selling tax reform and working with the Congress to pass it.

The Trump belief was that getting the growth of the economy to over 3% would generate enough tax revenues to offset the tax reductions. Whether this works will be an interesting observation in 2018.

Corporate taxes in fiscal 2017 were $297 billion, or 8.96% of collections. The overall corporate tax rate should have been about 35%. The tax bill that passed in December, 2017 lowered that rate to 21%. If corporate taxes would have grown 5% in 2018 without the tax reduction, with the tax reduction corporate tax receipts should be about $187 billion in 2018, a 37% or $125 billion decline.

The Democrats had argued that the tax bill was aimed at benefitting the wealthy. This is far from accurate. According to the nonpartisan Joint Committee on Taxation, in 2019, 48% of households will receive tax reductions of greater than $500. There are 100 million households in the U.S. If the taxes paid by all households averaged $500 per household, the tax bill would involve $50 billion of household tax reductions in 2019.

See:
The Trump Tax Cuts Have Been Approved By The Congress: Will the Deficit Increase By The $1.5 Billion Estimated And Will The Individual Tax Reductions Expire in 2025?
Brad Peery, December 21, 2017

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