The True Costs of Tax Reform
An analysis of the GOP Tax Plan
By Jackson Little Wood
The Progressive Teen Staff Writer
THROUGHOUT LAST YEAR’S ELECTION, TAX POLICY WAS ONE OF THE MOST discussed issues among Republican candidates. While all agreed that taxes had to be sharply decreased, there was little concordance on how to decrease these rates. Some of them proposed a flat tax while also eliminating deductions, while others proposed simply lowering the current tax brackets. Ultimately, Donald Trump ended up winning the election, leaving the electorate with no idea of what the actual tax plan would be. Throughout the campaign trail, Mr. Trump vacillated on what his tax plan would be: favoring the rich, while promising the working class relief. Now that Trump has been president for a little over 10 months, the Republican-controlled Congress has solidified a plan that certainly differs from Trumpian expectations.
The proposed plan includes several elements that are unsurprising, as they have been advocated for by Republican politicians for years. Primarily, the new plan would simplify the tax brackets by reducing the amount of them from seven to four. The new brackets would be structured as followed: those making over $1,000,000 would pay the current top rate of 39.6%, taxpayers making between $260,000 to $1,000,000 would pay 35%, earners making $90,000 to $260,000 would pay 25%, and those making $90,000 and under would pay 12%. One of the problems with these new brackets is that the poorest Americans would have their taxes raised. Currently if a worker earns under $19,050, they pay 10%. Their tax burden would be raised to 12% under the new plan, which means that people who are making minimum wage would have their taxes increased. For those already struggling to make a living, this extra two percent could spell disaster in their budgets for housing, food, and other basic essentials.
Another key aspect of the bill is increasing the standard deduction and the child tax credit. According to a New York Times analysis of the plan, “The new, single deduction would be higher for many filers, except those who claim multiple children. An increase in the child tax credit from $1,000 to $1,600 and a new $300 credit for each parent and non-child dependent could make up the difference.” While these deductions seem auspicious for the bill, they are paid for through the cuts of other crucial deductions, including the state and local tax write-offs.
Beyond deductions, the plan also creates a new 25% tax rate for “pass-through business”. These tend to be small sole proprietorships, partnerships, or S corporations. Currently, these businesses pay taxes at the individual level, and since most of the pass-through businesses pay about 25% now, the new tax seems harmless at its face value. The problem is that the new tax would drastically reduce revenue received from higher earning businesses. Today, the top 1.7% of pass through businesses generate about 40% of all the pass-through business revenue, and are taxed at the current top marginal rate of 39.6%. Well, if that rate is lowered to 25%, the amount of revenue received from those businesses is going to sharply decrease.
Finally, one of the most important aspects of the plan is lowering the corporate tax rate. The plan would lower the current corporate tax rate of 35% down to 20%, while eliminating most business deductions and credits. While GOP lawmakers say that eliminating these tax expenditures will play for the tax cut, an analysis by the Tax found that these cuts would reduce revenue so much that the corporate tax rate could only be lowered to 28.5%. Without raising the deficit, the 20% corporate tax rate would be impossible to achieve under the proposed framework. Currently, despite the highest statutory corporate tax rate in the world, U.S. corporations only pay about 18.6% due to deductions and credits. The deductions are what make the effective rate lower than the statutory rate. Eliminate those deductions and the effective rate will be much closer to the statutory rate. Because the statutory rate would be around 28.5% without the deductions, the GOP could end up raising the corporate tax rate by around 10%.
The new GOP tax plan attempts to address the issue of taxes in a variety of different ways, but there is one consistent problem that seems to be the theme of the plan; loss of revenue. According to a CNBC analysis, the tax plan would add about $1.7 trillion to the national debt over 10 years. The plan especially cuts taxes for the wealthiest Americans, as it decreases the amount of people who have to pay the top marginal rate of 39.6%. Revenue will also be lost in the elimination of deductions as well as the new “pass-through business” tax.
President Trump has an extremely ambitious agenda of increasing America’s military influence in the world, building a wall on the U.S/Mexico border, investing in American infrastructure, all without making significant cuts to social programs like social security. If President Trump wants his agenda to have a chance, he’s going to have to work with Congress to come up with a tax plan that pays for it, because this one doesn’t.
