The House of Representatives and the Senate, after a brief hiccup, finally passed the Tax Reform Bill, which the president is eager to sign. So the Republicans’ first major legislative accomplishment is, as they say, a done deal. Though the details of the bill have been covered over in a fog of controversy and political rhetoric, one thing is clear: It really will put a significant amount of money back into the pockets of taxpayers.
Liberals are outraged and indignant that most of the money will go to “the rich.” (See these charts.) Yes, those who make the most money and pay the most taxes will get the most money back. How could it be otherwise? And those who already have such a low income that they pay no taxes will pay no taxes still, so they will not get a tax saving. Yes, the biggest tax cuts are for businesses, but those benefit collective organizations rather than individual taxpayers, so it isn’t accurate to lump those numbers in as all going to “the rich.”
There are, indeed, problems with the bill and maybe fairness is one of them, but the fact remains that ordinary Americans who live paycheck-by-paycheck will get some significant tax relief. The standard deduction on the IRS form will double to $12,000 for an individual or $24,000 for a family. That can make a huge difference in a person’s tax bill, meaning that more families will be getting more and bigger tax refunds.
Also, the child tax credit would double to $2,000 per child. Not only that, but $1,400 of that would be refundable. “Refundable tax credits,” as explained by a tax site, “are treated as payments of tax you made during the year. When the total of these credits is greater than the tax you owe, the IRS sends you a tax refund for the difference.” That can amount to a very helpful windfall, especially for large families.
The most significant change, as far as the economy as a whole is concerned, is dropping the corporate rate from 35% to 21%. In the other developed nations, the average is 25%, making the American rate the highest in the world. As I recall, even the Democrats in the Obama administration used to consider that rate to be too high, working against American competitiveness in the world and giving U.S. businesses an incentive to take their money overseas.
Making the rate lower than the global average would help reverse those effects and might even encourage companies in other nations to move some of their money here! A lower rate can only increase economic growth.
This gift to corporations can help paycheck-to-paycheck Americans by spurring job-producing investments and raising wages. It can also bolster the stock market, helping pension funds and IRAs, which will help retirees.
The criticism is that company CEO’s don’t plan to use the money for new jobs, that it will just help shareholders, but economics isn’t a matter of top-down planning, either on the government’s part or on a CEO’s part. If a family has $200 per month more in their paychecks and get $1,000 more in their tax refund or if a shareholder makes money on a stock, they can spend that money any way they want or need to. It will be their money, not the government’s, and whether they spend it, pay off debts, or save it, that extra money will circulate through the private economy. More consumer spending will help businesses large and small, and as they grow, yes, they will create more jobs.
Having said all of this, there are problems with the new tax structure and legitimate concerns. These are largely a testimony to the magnitude of these cuts. The tax bill is projected to add between $1 trillion to $1.5 trillion to the federal government’s deficit, which is already way too high. Some conservatives think the increased economic activity the tax cuts will make possible will increase federal revenue, even at these lower tax rates, to make up for that. Some conservatives are also hoping that if the government receives less revenue, it will “starve the beast,” forcing the government to become smaller. Those Reagan-era principles don’t always work out that way in reality, but we shall see.
The biggest argument for the unfairness of the cuts is that the ones that most benefit ordinary individual taxpayers will expire in 2025, while the business breaks are permanent. The expectation is that Congress wouldn’t dare let that happen and would extend the cuts after the seven years. Maybe the government would be so crippled by lack of funds that the tax cut experiment would be halted.
At any rate, Americans should enjoy the extra money in their pockets for the next seven years, at least.
The new rates will go into effect in 2018, but Americans will first have to pay their taxes for 2017, under the old system. But the new withholding rates going into effect will give an immediate boost to paychecks.
For a very rough estimate of how these changes might affect you, try this tax cut calculator.
Illustration by geralt, via Pixabay, CC0, Creative Commons