Written by Pooja Narayanan
Under the current proposal, the seven existing tax brackets will be consolidated into four, with taxpayers contributing 12, 25, 35, or 39.6 percent of their incomes. This, however, ultimately lowers collected tax revenues, as a wider range of incomes are included in each bracket.
Backed by President Donald Trump, the GOP is attempting to overhaul the tax system in the United States, and it is very close to achieving this feat. Both House and Senate Republicans passed the Tax Cuts and Jobs Bill, and now it is set to move to a joint committee so differences can be reconciled. From there, the bill moves to the desk of President Trump for signing. By restructuring tax brackets and cutting taxes, the House’s plan aims to stimulate economic growth. Whether it can truly achieve that growth, however, is uncertain.
Under the current proposal, the seven existing tax brackets will be consolidated into four, with taxpayers contributing 12, 25, 35, or 39.6 percent of their incomes. This, however, ultimately lowers collected tax revenues, as a wider range of incomes are included in each bracket. The plan also eliminates certain tax credits and limits mortgage deductions.
Corporations would still have to pay the highest combined rate of 39.6 percent. However, rates for “pass-through” businesses, such as sole proprietorships, partnerships, and S corporations would be reduced to 20 percent. While most pass-through business are small, many are, in fact, large corporations.
Cutting taxes, in theory, should stimulate job growth. The GOP believes these cuts will have a “trickle-down effect,” incentivizing corporations to hire more workers and increase investment spending. The plan also proposes preferential rates for investment income, which mainly benefits households that make $200,000 to $1 million per year.
However, with the Fed signaling to raise rates this December, it remains to be seen how much impact this tax plan would really have. Raising rates makes the cost of borrowing higher, therefore incentivizing saving. Thus, raised rates slow down spending and consequently, the economy. However, tax cuts are thought to boost the economy by stimulating spending—in stark contrast with the Fed’s intended monetary policy. Thus, the effect of the tax plan is ambiguous at best.
Another concern is government debt. The government intends to cut taxes but has no clear plan to cut spending, leading to a greater budget deficit in the short-term, adding to the almost $21 trillion of U.S. debt. In their new plan, House Republicans have tried to limit the growth in debt by including a provision that caps the debt increase at $1.5 trillion.
Overall, whether the tax plan is a viable solution for stimulating the economy is questionable at best. While it seems to benefit businesses, the impact it would have on the federal budget balance is quite significant. Focus now moves to the committee responsible for reconciling the bills. If the bill makes it through, corporations will receive a holiday gift in the form of tax cuts.