Analysis: Tax Cuts From Reform Proposal Seen as Revenue Neutral in 10 Years’ Time

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The Trump Administration’s tax overhaul plan would be just about revenue neutral in ten years’ time, as revenue loss from tax reductions are forecast to be offset by the benefits of economic growth, according to the Tax Foundation.

The Tax Foundation’s analysis differs from that by the Joint Committee on Taxation. But the differences between the two models have been long-standing, according to the Tax Foundation.

The Tax Foundation believes that economic growth would produce almost $1 trillion more in federal taxes, which would cut the estimated revenue loss from the tax reform plan, according to its analysis of the recently released Tax Cuts and Jobs Act.

The upshot? The bill eventually would bring 3.9 percent growth in gross domestic product, create almost 1 million new full-time jobs and increase wages by 3.1 percent. The average middle-income family would see higher after-tax income of about $2,598 over a decade.

On a static basis, the proposed bill would lead to a 0.9 percent increase in after-tax income for all taxpayers and a 3.3 percent gain in after-tax income for the top 1 percent in 2027, says the Tax Foundation.

“When accounting for the increased GDP, after-tax incomes of all taxpayers would rise by 4.4 percent in the long run,” the foundation states.

On the other hand, the Joint Committee on Taxation figures the static revenue loss to be $1.5 trillion over a decade.

“Because of technical differences between our models, the [foundation’s Taxes and Growth Model] generates a slightly higher estimate of the revenue loss from the plan — $1.98 trillion using a current law baseline,” the foundation states in its study. “Irrespective of these differences, the $1 trillion in new tax revenues generated by the economic growth would go a long way toward bringing the plan closer to revenue neutral within the first ten years.”

Here’s a closer look at key takeaways, courtesy of the Tax Foundation’s analysis:

Individuals

  • The current seven tax brackets would be reduced to four: 12 percent, 25 percent, 35 percent and 39.6 percent.
  • The standard deduction for singles increases from $6,350 to $12,200; from $12,700 to $24,400 for married couples filing jointly; and from $9,350 to $18,300 for heads of households.
  • The personal exemption goes away. A personal credit of $300 is created with a $300 non-child dependent personal credit for five years.
  • The child tax credit is increased to $1,600 with an initial refund of $1,000. That refund portion is indexed to inflation until the full $1,600 is refundable. For married households, the phase-out of the child tax credit rises from $110,000 to $230,000.
  • The mortgage interest deduction is kept but caps it at $500,000 of the principal on newly purchased homes.
  • Deductions for charitable contributions and state and local property taxes are retained, capping the property taxes at $10,000. The remaining state and local tax deduction goes away, along with other itemized deductions, which the foundation’s report doesn’t delineate.
  • The individual alternative minimum tax goes away.
  • Tax brackets and “other components” that use the chained Consumer Price Index inflation measure are indexed.

Businesses

  • The corporate income tax rate is cut from 35 percent to 20 percent.
  • The corporate alternative minimum tax goes away.
  • Pass-through business income will be taxed at a maximum of 25 percent (subject to anti-abuse rules).
  • Capital investments, except for structures, can be fully and immediately deductible for five years. The Section 179 expensing limit rises from $500,000 to $5 million, with an increased phase-out threshold.
  • The deductibility of net interest expense on future loans is limited to 30 percent of earnings before interest, taxes, depreciation, and amortization for all businesses with gross receipts of $25 million or more.
  • The deduction of net operating losses is cut to 90 percent of net taxable income and allows net operating losses to be carried forward indefinitely, increased by a factor reflecting inflation and the real return to capital. Net operating loss carry-backs go away.
  • The domestic production activities deduction (section 199), and other business deductions and credits, go away.
  • A territorial tax system is created, which exempts from U.S. tax 100 percent of dividends from foreign subsidiaries.
  • Enacts a deemed repatriation of currently deferred foreign profits, at a rate of 12 percent for cash and cash-equivalent profits and 5 percent of all other profits.

And last, but not least, federal estate taxes go away.

About Terry Sheridan

Terry Sheridan

Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.

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