Tax reform is going to be a reality. The House and the Senate have reconciled their bills, and will soon be sending a final draft to President Trump's desk for his signature.
Naturally, the sweeping reform has left many Americans to wonder who wins and who loses under the soon-to-be law. After a cursory glance, here are three groups that are set to win big, and three who may struggle.
The centerpiece of the GOP plan is a major cut to the corporate tax rate. The new plan would reduce the statutory corporate tax rate from 35 percent to 21 percent, and allow multinationals to repatriate foreign income on "high-profit returns" (such as intellectual property) back into the U.S. at a rate of just 10 percent (12 percent on cash held offshore and 5 percent for non-cash assets). A recent report from WalletHub finds that the average corporate rate paid by companies is roughly 27 percent, so the new bill could represent potentially hundreds of millions (even billions) in savings.
The new top individual tax rate would fall from 39.6 percent to 37 percent. A study from the Urban-Brookings Tax Policy Center found that, in 2018, the top one percent of earners would get an average tax savings of $51,140, and the top 0.1 percent would get $193,380. The bottom fifth of income-earners would get an average cut of $60 and those in the middle fifth would get a $930 cut on average, with the average American tax cut set to come in at roughly $1,610.
Taxpayers who take the standard deduction.
The focal point of the plan that Republicans have used to sell this to the non-corporate taxpayer has been the doubling of the standard deduction. It is set to increase to $12,000 for individuals, $18,000 for heads of household, and $24,000 for joint filers. That should reflect a nice boost to workers' take-home pay per paycheck - the Tax Policy Center puts the average tax benefit for households making $50,000 to $75,000 at $850 - and it would all but end the need for many taxpayers to itemize their deductions.
Over seventy percent of U.S. companies are structured as pass-through entities, such as S-corporations and limited liability corporations (LLCs). Under the Republican tax plan, the pass-through rate falls to 25 percent. That may seem like a windfall, but critics argue a significant number of small businesses make less than $250,000, so they already pay less than 25 percent in taxes. Moreover, there is a stipulation in the proposal which says the 25 percent pass-through rate applies only to passive owners of these businesses. For those who are directly involved in the daily operation of the business -- say, the owner/operator of a small trucking business, or the proprietor of a professional services firm -- the bill presumes that 70 percent of that pass-through income is attributable to labor and makes it taxable at the higher individual income tax rate. There is a second test under the legislation that establishes a ratio of wage income and business income based on level of capital investment that some industries, such as doctors, accountants, lawyers, are required to use this second test.
Ironically, one winner will likely emerge from the pass-through tax reform: accounting firms who will be busy developing work-arounds and otherwise restructuring S-corporations and LLCs to find the most profitable formula under the new tax law.
Homeowners with High Property Taxes
The bill calls for a reduction in the amount of interest on a mortgage that is deductible. The old cap allowed for a married couple to deduct the interest for a mortgage up to $1 million, and the new plan would cut that amount to mortgages up to $500,000. In addition, property tax deductions would be capped at $10,000 a year, which means that areas with high property taxes - such as California or the Northeast - would see their deductions capped.
With the doubling of the standard deduction, Americans will largely move away from itemizing their deductions, and as a result, charities fear that taxpayers will also lose their incentive to give. Without the tax benefit, charities view the drop off as inevitable. Regionally, The United Way is already expecting a decrease. The president and CEO of the group's California Capital Region, Stephanie Bray, told The Sacramento Bee that she expects a five percent dip. Nationally, Una Osili, professor of economics and associate dean for research and international programs at the Indiana University Lilly Family School of Philanthropy, predicted at least a $13 billion drop in charitable giving to The Washington Post.
The X-Factor in Tax Reform
Of course, all of these observations are based on the GOP tax reform proposal as it is written. How it will be interpreted in practice by accounting firms, large corporations, small businesses and individuals is another story altogether. As we've seen countless times over the years, tax reforms always come with unintended consequences that only emerge once tax payers have had some time to digest the new rules, adjust their reporting accordingly, and start making the tweaks and refinements that will help them maximize profit and minimize tax. This is the X-factor in any new tax scheme and one we will be watching closely over the coming weeks and months as these new reforms are introduced.