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US Politics: TCJA, roads not taken

March 3, 2018

Since it’s getting close to tax time, I stumbled across something that dropped entirely off my radar – the 2017 Tax Cuts and Jobs Act (TCJA). Aka the Trump tax cut. Classic trickle-down economics. (It doesn’t actually affect me until the NEXT tax filing).

The details are many, but it’s basically front-loaded, and most of its benefits go to upper income individuals and businesses. Over the next decade, it represents a transfer of close to a trillion dollars from the lower-middle and middle class to the upper class.

A typical/median-income level US household will see something like a $1000 reduction in 2018. However, the formulas for future adjustments, and future expirations of parts of the law, result in the whole package tilting further in favor of upper incomes and big businesses, in future years.

The TCJA barely passed (51-48 in the Senate), along party lines – give all Democrats credit for voting against it. You would think this would be a valuable talking point. However, since its passage, silence.

Perhaps as a result, public perceptions are drifting and the TCJA appears to be gaining in popularity, breaking even in approve/disapprove as of mid February.

link: https://www.nytimes.com/2018/02/19/business/economy/tax-overhaul-survey.html

link: https://www.washingtonpost.com/news/the-fix/wp/2018/02/01/the-gops-big-tax-cut-gamble-appears-to-be-paying-dividends


2017 TCJA, SELECTED DETAILS

None of this applies until the 2018 tax year, so what you’re going to file in April is unchanged (with a handful of obscure exceptions).

Rates — Under the TCJA, tax rates themselves for most people’s brackets go down by 3% of adjusted income (or 4% for “upper-middle” incomes).

Personal exemptions eliminated, rolled into Standard Deduction and Child/Dependent Credits – A bunch of shuffling replaces personal and dependent exemptions, with a combination of raised standard deduction and additions to child and dependent tax credits. Resulting net change for most typical individuals and families is something like a 1% tax increase vs top-line income, partially counteracting that 3-4% above.

Brackets – The formula for inflation-adjustment of the brackets is changed to a weaker flavor of the CPI. This will make the brackets rise slower (a tax increase over time).

Small Businesses and “Self-Employed” – This is a major item for me. Individual income from pass thru’s (e.g., LLP’s, self-employment) is now 20% deductible (up to $315k/$157k). For a self-employed middle-income earner, this means an additional tax cut of 5-6% (as a % of top-line income). This represents relief for the ever-expanding “gig economy”. For professionals paid via 1099’s, this is a fantastic bonus – an extra half month’s pay in after-tax $ for typical income levels.

Big Businesses  – Another big item. Corporate tax rate drops from 34-35% to 21%.  Businesses with earnings parked in foreign jurisdictions can repatriate them for 8%/15%. Corporate AMT eliminated. Business Interest deductibility now limited to 30% of EBITDA.

Mortgage Interest Deduction – Upper limit on mortgage interest deduction is reduced from $1MM to $0.75MM (max loan balance on which interest is deductible). Second mortgage interest no longer deductible. May have effects.

State and Local Tax Deduction – Deductibility of state/local taxes (incl. property taxes!) capped at $10k. Hits high-tax states like NY/CA hard enough that Republicans in these states voted against the TCJA.

Obamacare  – “individual mandate” penalties eliminated starting 2019.

Estate Tax – Exemption from Estate/kid-gift tax doubled from $5.6MM to $11.2MM. Even fewer people will now be paying any such tax.

AMT – Exemption from Alternative Minimum Tax raised to $109k/$70k, from $84k/$54k. Fewer people will be paying AMT now.


What does this add up to?

  1. There are at least some goodies for most everyone. However, the bulk of the benefits goes to big businesses, small businesses, higher income individuals / households, and self-employed individuals / households, in roughly that order. (not sure about the middle two).
  2. Impact on US tax revenue? CBO estimate: additional budget deficit of $1.45 tril over 10 years.

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