Congress passed the Tax Cuts and Jobs Act (TCJA) in late 2017, undoubtedly hailed the most drastic amendment to the Internal Revenue Code of 1986 since that year.[1] For individual income tax purposes, changes include a virtually doubled standard deduction, sharp limitations on itemized deductions, reduced income tax rates, and reforms to several other provisions.[2] The ‘simplified’ tax code was also forecasted to yield economic savings thanks to less time spent preparing tax forms and support due to the eliminated personal exemption and more filers utilizing the simplified standard deduction instead of cumbersome itemized deductions.[3] For example, itemized deduction rules are tedious (no surprise), requires extra forms/schedules, and require detailed record keeping.[4] A residual effect of this is the share of taxpayers who use the mortgage interest deduction will decrease by more than half to only about 8 percent of tax filing units.[5] This may make it easier for policymakers to replace the deduction with a first-time homebuyers’ tax credit to promote homeownership, in general, for most income levels.[6] To boot, far fewer filers will need to spend time working on the Alternative Minimum Tax Liability form, previously a major financial and time consuming burden on individual tax filers.[7]
In addition, economists claim the TCJA places the United States on a more competitive corporate landscape by remedying three prior disadvantages: cost recovery, worldwide application, and a high statutory rate.[8] The TCJA, reduced the federal corporate income tax rate from 35 percent to 21 percent, dropping the U.S. combined rate from 38.9 percent to 25.7 percent and placing the U.S. nearer to the average of major countries including Canada, France, Germany, Japan and the United Kingdom.[9] The benefits of a lower corporate income tax rate include encouraging business overseas to invest capital or operations in the United States, leading to higher productivity, output, employment, and wages over time.[10] The historical nominal 35 percent corporate income tax rate prior to the TCJA used to cause companies such as Apple to borrow cash to buy back shares and increase its stock dividend instead of paying taxes to the U.S. Government, among other tax avoidance or profit sharing strategies.[11] However, international rules, including those promulgated under the TCJA, have reduced incentives to keep profits overseas and reduced the value of tax avoidance via income shifting.[12]
Nevertheless, the TCJA has faced its criticism long after it’s signing. It is reported that the legislation will cost approximately $1.5 trillion over the next ten years and deliver windfall gains to already wealthy households and corporations, leave the nation less prepared to address the financial implications resulting from the baby boom retirement, and tax exploitations that were previously incomprehensible.[13] The legislation was further criticized for being the wrong thing at the wrong time since the tax cuts are deficit finances to an economy with low unemployment and high debt.[14] From 2017 to 2018, corporate tax revenues fell by around 40%, which may contribute to an increase in the primary deficit at $1.3 trillion over ten years and the overall debt increase at $1.9 trillion.[15] Also, it is key to consider the difficult to ascertain effect of policy or economic uncertainty. It is argued that the TCJA makes the future tax code less predictable, both because it expands deficits and sunsets many tax provisions that Congress may or may not extend.[16]
Though the concerns are not unfounded, the post-TCJA economy is largely positive.[17] Earlier this year, the government’s initial estimate of Q1 Gross Domestic Product reported a strong annualized growth rate of 3.2 percent, an improvement from the 2.1 percent pace of a year ago.[18] The increase is a result of a burst in exports, a decline in imports, and a rise in inventories.[19] Although it would be unfair to pin these changes directly to the TCJA, the output is in line with what the tax legislation pointed to.[20] Lastly, the Treasury collected roughly the same approximately $370 billion (comprised of $351 billion in individual income taxes and about $17 billion in corporate income taxes for the first three months of 2019) in the first three months of 2019 as it did in the same pre-TCJA period of 2017 ($342 billion in individual income taxes and $24 billion in corporate income taxes).[21] While tax revenue has not substantially decreased as was contemplated, federal spending has increased.[22] Needless to say, it may take a few more quarters of economic activity to get a true sense of the impacts of the Tax Cuts and Jobs Act.
Endnotes:
[1] Bryce Welker, Understanding the Pros and Cons of the New Tax Law, Inc., Feb. 8, 2018, https://www.inc.com/young-entrepreneur-council/tax-reform-small-businesses-good-bad.html
[2] Erica York, The Tax Cuts and Jobs Act Simplified the Tax Filing Process for Millions of Households, Tax Foundation, Aug. 7, 2018, https://taxfoundation.org/the-tax-cuts-and-jobs-act-simplified-the-tax-filing-process-for-millions-of-americans/
[3] Id.
[4] Tina Orem, Itemized Deductions: What They Are and How They Can Slash Your Tax Bill, Sept. 6, 2019, https://www.nerdwallet.com/blog/taxes/itemize-take-standard-deduction/
[5] William G. Gale, A fixable mistake: The Tax Cuts and Jobs Act, Brookings, Sept. 25, 2019, https://www.brookings.edu/blog/up-front/2019/09/25/a-fixable-mistake-the-tax-cuts-and-jobs-act/
[6] Id.
[7] Erica York, The Tax Cuts and Jobs Act Simplified the Tax Filing Process for Millions of Households, Tax Foundation, Aug. 7, 2018, https://taxfoundation.org/the-tax-cuts-and-jobs-act-simplified-the-tax-filing-process-for-millions-of-americans/
[8] Id.
[9] Id.
[10] Id.
[11] Floyd Norris, Apple’s Move Keeps Profit Out of Reach of Taxes, New York Times, May 2, 2013, https://www.nytimes.com/2013/05/03/business/how-apple-and-other-corporations-move-profit-to-avoid-taxes.html
[12] William G. Gale, A fixable mistake: The Tax Cuts and Jobs Act, Brookings, Sept. 25, 2019, https://www.brookings.edu/blog/up-front/2019/09/25/a-fixable-mistake-the-tax-cuts-and-jobs-act/
[13] Chuck Marr, Brendan Duke, and Cyhe-Ching Huang, New Tax Law Is Fundamental Flawed and Will Require Basic Restructuring, Aug. 13, 2018, https://www.cbpp.org/research/federal-tax/new-tax-law-is-fundamentally-flawed-and-will-require-basic-restructuring
[14] William G. Gale, A fixable mistake: The Tax Cuts and Jobs Act, Brookings, Sept. 25, 2019, https://www.brookings.edu/blog/up-front/2019/09/25/a-fixable-mistake-the-tax-cuts-and-jobs-act/
[15] Id.
[16] Id.
[17] Howard Gleckman, and Aravind Boddupalli, The Post-TCJA Economy Continues To Grow, May 7, 2019, https://www.taxpolicycenter.org/taxvox/post-tcja-economy-continues-grow
[18] Id.
[19] Id.
[20] Id.
[21] Id.
[22] Kimberly Amadeo, US Federal Budget Breakdown, Nov. 20, 2019, https://www.thebalance.com/u-s-federal-budget-breakdown-3305789
