ATR Analysis of the Tax Cuts and Jobs Act

by Alex Hendrie, Americans for Tax Reform, November 2, 2017

House Ways and Means Chairman Kevin Brady (R-Texas) today released long awaited tax reform legislation, entitled “The Tax Cuts and Jobs Act.” This legislation contains many provisions that simplify the tax code, give tax cuts to families and businesses, and grow the economy leading to higher wages and new or better jobs. The release of this bill represents an important step toward achieving pro-growth tax reform in 2017. Chairman Brady and his staff should be commended for releasing this detailed legislation.

Under this proposal, as many as 95 percent of taxpayers could file on a postcard since the majority of taxpayers would no longer itemize and many existing provisions (such as those relating to family and education provisions) would be consolidated and simplified. These reforms would also allow the IRS to be reduced in size and scope.

In addition, the bill will reduce the corporate tax rate from 35 percent to 20 percent effective 2018. This competitive rate will place American businesses on a level playing field with foreign competitors and will ensure the economy grows by at least three percent, as President Donald Trump has promised.

Individual Provisions:

• - Consolidates the seven tax brackets into four (12%, 25%, 35%, and 39.6%) - Under this reform, the existing 10 percent bracket goes to zero. The 15 percent bracket goes to 12 percent.
  • -The 12 percent bracket applies to income up to $45,000 ($90,000 for married couples). This does not include the standard deduction of $12,000 or $24,000.
  • -The 25 percent bracket applies to income between $45,001 and $200,000 ($90,001 and $260,000 for married couples).
  • -The 35 percent bracket applies to income between $200,001 and 500,000 ($260,001 and $1 million for married couples).
  • -The 39.6 percent bracket applies to income above $500,000 ($1 million for married couples).
• -Doubles the standard deduction (The first $12,000 for individuals and $24,000 for families will not be taxed). 
• -Increases the child tax credit from $1,000 to $1,600 per dependent under 17 with an additional $300 credit per parent. The child tax credit is currently used by 22 million Americans.
• -Simplifies the tax code – The bill repeals personal exemptions, repeals the state and local tax deduction for income and sales taxes and caps the SALT deduction for property taxes at $10,000. The home mortgage interest is grandfathered in and preserved for new homes up to $500,000. All other itemized deductions with the exception of charitable giving are repealed.
• - Repeals the alternative minimum tax – This tax is currently paid by 4.5 million individuals and families.
• - Repeals the death tax effective 2024 - In years 2018 to 2023, the exemption is doubled to $10 million ($20 million for a couple) and indexed to inflation. The generation skipping transfer tax is also repealed while the gift tax is lowered from 40 percent to 35 percent. Step-up in basis is preserved.
• - Preserves retirement tax savings accounts such as 401(k)s and Individual Retirement Accounts.  

Business Provisions:

• - Permanently reduces the corporate income tax rate to 20 percent effective immediately - The current 35 percent federal rate is the highest in the developed world. Reducing this rate to 20 percent will allow American businesses to compete against foreign competitors and will allow the U.S. economy to grow. According to an analysis by the Council of Economic Advisers, a 20 percent corporate rate would increase average household income by between $4,000 and $9,000.
• - Enacts 100 percent, full business expensing for five years - Section 179 small business expensing is increased from $500,000 to $5 million, and the phaseout is increased from $2 million to $10 million.
• - Reduces the business tax rate on pass-through entities from 44.6 percent to 25 percent - This new rate would be applied based on one of two formulas designed to prevent wage income from being mischaracterized as business income.
• - Repeals numerous distortionary tax credits but preserves the Research and Experimentation (R&E) credit.
• - Implements a partial cap on deductibility of net interest expense for corporations - The cap will be applied when a corporation’s net interest exceeds 30 percent of earnings before interest, tax, depreciation and amortization (EBITDA).
• - Implements a modern, territorial system of taxation so that American businesses operating overseas can compete.
• - Introduces a one-time repatriation rate of 12 percent for cash and 5 percent for non-cash, payable over eight years.This allows $2.6 trillion in after-tax income to come back to the U.S. to be reinvested in the economy. Ideally, the repatriation rate should be single digit rates. However, this reform will still allow trillions to come back into the U.S. economy.