On November 29, 2018, while on one of his public speeches to rally his base, President Donald Trump said the Republican-controlled congress was going to pass a tax bill that “will be really, really special”. He is right, but not in a good way.
According to a new report just released by the Joint Committee on Taxation (JCT), a bipartisan committee charged to do the analysis by the Senate Committee on Finance, the bill will increase Gross Domestic Product (GDP) output for the by about 0.8 percent more over the next ten years. That is unfortunately only one-third of the cost of the other aspects of the bill, mostly a series of tax cuts that favor corporations and wealthy. All of those together will add around $1.5 trillion to America’s debt.
The 'Tax Cut and Jobs Act', as it is called, at this writing includes these changes in the tax code, most which sound good but for the most part are pure benefits for the rich and for companies:
- The tax rate for large corporation drops from 35% to 20% starting in 2019. That's a 43% drop in total taxes. (The logic is that the U.S. has one of the highest corporate tax rates of all countries. It doesn't, not when one considers all the deductions companies can use. But that's the sales pitch.)
- Corporations can bring back cash now held overseas with a maximum 10% tax rate for those funds.
- Companies can write off most of their expenses associated with new buildings and other investments for five years.
- The Alternative Minimum Tax (AMT), a tax designed to ensure that the wealthy cannot use deductions to completely eliminate their paying taxes, is being eliminated. Most Americans don't know about it because the tax only affects the wealthiest taxpayers.
- The top individual income tax rate is decreased from 39.6% to 38.5%. That tax level, by the way, only applies to married couples making a total of over $1 million per year. All other tax rates are lower.
- Statutory tax rates are decreased for most tax rate brackets
- The measure used to adjust tax brackets is being changed, from the current approach which monitors inflation based on the consumer price index (CPI-U) to the chained consumer price index (changed CPI), a value which grows more slowly than the old index.
- The ‘individual shared responsibility payments’ for failure to obtain qualified health insurance as part of the Obama-era Affordable Care Act have been reduced to ‘zero’.
- Standard deductions are increased for all Americans.
- Tax deductions are completely eliminated for both state and local tax deductions, a category of deductions called SALT. This will have a major impact on property owners and even those who can itemize who are deducting sales tax. It hits the middle class hard.
- Tax deductions for losses from 'fire, storm, shipwreck, or other casualty, or from theft' are completely eliminated.
- Tax deductions for moving expenses are completely eliminated. It will now be harder for workers to afford to move to find new jobs, now that their expenses connected with those moves cannot be deducted.
- Tax deductions for tax preparation expenses are eliminated.
- Tax deductions for people who bike to work are eliminated.
- The exemption for the Estate, Gift, and Generation Skipping Transfer tax has been essentially doubled, representing a major gift to the wealthy.
Even without the new law’s tax cut gifts to corporations and the wealthy, the rate of U.S. debt growth is so high that major Wall Street bank Goldman Sachs sent out a warning on November 30 that U.S. debt will soon hit unsustainable levels. The bank further stated in their announcement that the debt, as calculated as a ratio of GDP, is at the highest level it has ever been since 1950. Goldman further raised the alert that “The tax reform bill and spending increases that are making their way through Congress should increase the deficit further, raising it from 3.2% of GDP in 2016 to 5.1% in 2021.”
Goldman also signaled that a major stock market correct would likely be coming starting as early as 2019.
Trump and his allies in the Republican congress keep saying the tax cuts will pay for themselves, using the ludicrous logic that if companies pay less taxes they will invest more in themselves and raise salaries (which would increase spendable income). They have already acknolwedged that they will not do that. With that -- call it 'crazy' -- assumption as their basis for the figures, the White House in fact projected a 3 to 5 percent faster growth rate in the next ten years than what came out in the JCT results.
That ‘voodoo economics’, to borrow a Reagan era catch phrase, turns out to be dead wrong. The Tax Policy Center, the Tax Foundation and the Committee for a Responsible Fiscal Budget came in with figures which back up the high-risk, high-debut increase scenario predicted by the JCT analysis.
And as to the Republicans that most people will see a tax cut under the current bill proposal, that is far from true. According to the same JCT analysis only 44% of taxpayers would see tax savings by more than $500 in 2019. 38 percent taxpayers would either pay about the same amount in taxes as now or get a tax hike.
As of this writing, the bill is going through some adjustments related to the debt increase, but it still looks like it has a good chance of passage. It will be “really, really special”, as President Trump put it, especially as it further broadens income equality in the United States and further bankrupts the American economy.
The JCT report referenced here is available for download at: https://www.jct.gov/publications.html?func=startdown&id=5045. It is an automatic download.