On Thursday, Nov. 2, the House Republicans released their latest edition of a tax plan meant to rewrite the U.S. tax code. This plan possibly represents the biggest change to the tax code in the past few decades, according to CNBC. The passing of the plan could also give President Donald Trump his first large legislative win, a potentially important victory after the Republicans failed to repeal Obamacare, even when holding the presidency and a majority in both the House and the Senate.
The tax plan, titled the Tax Cuts and Jobs Act, aims to cut taxes and remove popular deductions in such a way that may affect large swaths of the U.S. economy. One of the main propositions of the plan is a reduction in the corporate tax rate to 20 percent permanently.
This change would help firms who have complained for years about paying high taxes. Republicans have claimed that the lower corporate tax rate would lead to company employees receiving higher salaries.
House Republicans also want to decrease the number of income tax brackets from seven to four, which would be 12 percent, 25 percent, 35 percent and 39.6 percent, according to Bloomberg. The child tax credit will be increased from $1,000 to $1,600. So far, there will be no changes to retirement accounts like 401(k)s, Roth IRAs and Regular IRAs.
The Republican tax plan also seeks to almost double the estate tax exemption, eventually repealing the tax in six years. The estate tax, also called the death tax, is a 40 percent tax on estates greater than $5.49 million for individual filers, and $11 million for married filers, according to The New York Times.
One of the possible major changes the tax plan wants to enact is reducing taxes for companies with international earnings.
This is an attempt by House Republicans to encourage U.S. corporations to repatriate some of the money they are currently holding overseas. Keeping profits overseas is popular among U.S.-based companies because other countries usually have much lower corporate tax rates compared to the United States.
The Republican plan would seek to cut the tax rate of foreign-earned income to 12 percent for cash and 5 percent for non-cash, according to CNBC.
Companies like Apple, which hold hundreds of billions of dollars in cash overseas, could benefit greatly from this policy change. Other technology companies, who also tend to hoard cash overseas, may follow suit.
The standard deduction would be nearly doubled as well, which means that some middle-class families could receive smaller tax bills. However, this depends on every person’s particular situation. The bill also calls for the capping of the state and local tax deduction, so those who live in blue states with high taxes, like New York and California, could end up paying more, despite the increase in standard deduction.
Wealthy Americans benefit in multiple ways. Since the tax brackets will be reduced to four, millionaires will all pay a steady rate of 39.6 percent. The increase in the estate tax exemption, and its eventual elimination along with the elimination of the alternative minimum tax, which both apply largely toward the upper class, is mainly for their benefit.
Despite Trump’s assertion that “hedge fund guys are getting away with murder,” they also benefit from the House Republican tax plan. Trump promised during his campaign to get rid of the carried interest loophole, which allowed the fees paid to wealthy people on Wall Street to be taxed at the much lower capital gains rates, instead of the regular income tax rate. However, a fix to this loophole is not in the House Republican tax plan.
Graduate students, charities and the sick are among those who could be negatively impacted by the tax plan. For graduate students, the plan would tax tuition waivers as income, in some cases doubling the amount that these students would need to pay in taxes.
Charities are worried that the increase in the standard deduction will reduce people’s incentive to give to charity to reduce their taxable income, which would lead to less giving to charity overall. Under the plan, the deduction for medical expenses would be eliminated. According to The New York Times, AARP stated that, “they strongly opposed the repeal of the deduction and said that doing so would impose a health tax on the oldest and sickest Americans.”
According to CNBC, the Joint Committee of Taxation of the nonpartisan Congressional Budget Office estimates that the new House Republican tax plan would increase federal budget deficits by $1.7 trillion over the next 10 years. U.S. debt would also increase 6 percent to 97.1 percent of gross domestic product in 2027.
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