Corporations, broadly, are the focus of most of the tax cuts. According to the Joint Committee on Taxation’s analysis of the bill, cutting the corporate tax rate from 35 percent to 20 percent starting in 2019 costs more than $1.33 trillion over 10 years. The new compromise version increases the rate somewhat to 21 percent, but the cost remains similar, especially because under the new bill the cut begins in 2018, not 2019. Corporations also in many cases gain new, more favorable treatment of income earned abroad, which is either not taxed or taxed at an even lower rate than 21 percent.
Wealthy, particularly ultrawealthy, people tend to earn a disproportionate share of their income from capital (like stock sales and dividends) and thus benefit from cuts to the corporate tax, which is largely a tax on capital. You see this in the TPC analysis above. If the corporate tax also reduces wages, as some conservative economists allege, then corporate cuts still disproportionately help the wealthy, as a huge share of wages go to high earners, not low- or median-wage workers. Additionally, the pass-through tax cut could enable some wealthy people who either own pass-throughs or create new ones to shelter some of their income from high rates.
People making mid- to high six-figure incomes, who arguably should count as wealthy or rich too. Their top income tax rate is reduced from 39.6 percent to 35 percent, and they additionally benefit from other individual rate reductions for lower tax brackets. While many face lower tax deductions due to changes in how state and local taxes are treated, they will probably come out ahead overall.
Pass-through companies, like the Trump Organization, which get a new deduction reducing their tax burden. The House-Senate compromise bill allows people with pass-through income to deduct a portion of that income from their taxes; the deduction is for 20 percent of pass-through income, less than the 23 percent under the Senate-passed bill.
Heirs and heiresses, as the estate tax’s exemption is doubled from $5.5 million to $11 million, meaning an even smaller share of the ultrarich will pay the tax — and even those who do pay will pay substantially less than under current law.
But the bill would hurt the poor and increase the deficit
Poor families were rumored to be getting a tax cut due to a change in the refundability formula for the child tax credit — but that didn’t make it into either the House or Senate bill. The credit only goes to families with $3,000 in earnings or more, and phases in slowly; some in Congress were pushing to lower the threshold to $0, but the Senate bill instead lowered it to $2,500, a pretty mild change. Marco Rubio got an extremely minor further expansion of the credit included in the compromise bill, which doesn’t change the situation for very poor people.
Medicaid and insurance subsidy beneficiaries, a group of poor and middle-class people who’d lose benefits without the individual mandate pushing them into insurance. Upper-middle-class people still buying individual insurance would pay higher premiums.
Rich blue-state residents would pay higher taxes, as deductions for state and local taxes are capped at $10,000. That said, wealthy people benefiting from these deductions will likely see this tax hike offset by the other tax cuts in the package.
And it would increase the deficit; the Joint Committee on Taxation scored the Senate-passed bill as costing $1.45 trillion over 10 years, and the cost of the House-Senate compromise bill is likely similar.
Individual income tax rates are adjusted
The seven current individual income tax brackets are changed. In 2017, for a married couple the brackets are: 10 percent (taxable income up to $18,650); 15% ($18,650 to $75,900); 25% ($75,900 to $153,100); 28% ($153,100 to $233,350); 33% ($233,350 to $416,700); 35% ($416,700 to $470,700); 39.6% (taxable income over $470,700)
Under the new plan they’d be: 10% (taxable income up to $19,050); 12% ($19,050 to $77,400); 22% ($77,400 to $165,000); 24% ($165,000 to $315,000); 32% ($315,000 to $400,000); 35% ($400,000 to $600,000); 37% (taxable income over $600,000)
The top rate is cut and the threshold is raised. Most middle-class taxpayers would be in a 12 percent bracket, not 15 percent, and many affluent, upper-middle-class households would be knocked from a 25 percent bracket to 22 percent, or from 33 percent to 24 percent, or from 39.6 percent to 35 percent.
The thresholds for brackets will be adjusted according to chained CPI, a slower-growing measure of inflation than normal CPI, which is used currently; this change raises revenue over time by gradually pushing more and more people into higher tax brackets.
The standard deduction will be raised to $24,000 for couples and $12,000 for individuals, a near doubling from current levels.
The child tax credit will grow from $1,000 to $2,000; only the first 1,400 will be refundable, and access for poor families is not significantly expanded.
The child credit would be available for many more wealthy households: It would start to phase out at $400,000 in earnings for married couples, as opposed to $110,000 under current law.
The personal exemption (currently offering households $4,050 per person in deductions) is eliminated, replaced in theory by the higher child credit, lower rates, and higher standard deduction.
Some deductions are limited, but most remain intact
The mortgage interest deduction is limited to the first $750,000 of a mortgage’s value. This is a compromise between current law (where the limit is $1 million) and the House bill (which lowered that to $500,000).
The deductions for state and local income/sales taxes, and state and local property taxes, are limited to $10,000 total.
Most major tax breaks for individuals — the charitable deduction, retirement incentives like 401(k) and IRA provisions, the tax exclusion for employer-provided health care, the earned income tax credit, and the child and dependent care tax credit — would not be cut.
Major tax breaks that the House bill would’ve eliminated, including the exclusion of tuition waivers for graduate students, the deduction for student loan payments, the medical expense deduction, and the adoption tax credit, are preserved.
The corporate income tax rate will be lowered from 35 percent to 21 percent.
The corporate tax will be “territorial”: Foreign income by US companies will be, in general, tax-free.
All untaxed income currently held overseas will immediately be taxed at a fixed rate, much lower than the current rate, effectively rewarding companies that kept money overseas.
Despite the tax being “territorial” in principle, there will be a “minimum tax” imposed on profits that foreign subsidiaries of US companies earn from intangible assets like patents and copyrights, to prevent companies from moving those assets abroad to avoid taxes, which is a very easy tax evasion move under current law. There’s also a tax on money shifted to overseas subsidiaries.
Instead of having companies “depreciate” investments by deducting them over several years, companies could immediately expense all their investments. This benefit expires after five years, presumably to save money, which dampens any positive effect it has on economic growth.
Companies paying the corporate income tax would face a limit on how much debt they can deduct from their taxable income, a significant change for highly leveraged companies like banks.
Two big existing credits for corporations — the research and development tax credit and the low-income housing credit — won’t be repealed. But a deduction for domestic manufacturing is gone.
“Pass-through” companies like LLCs, partnerships, sole proprietorships, and S corporations, which are overwhelmingly owned by rich individuals like Donald Trump and currently pay normal income tax rates after their earnings are returned to the companies’ owners, would get a number of tax cuts too:
Most taxpayers with pass-through income would be able to deduct 20 percent of that income, effectively lowering the top rate they pay.
To limit the deduction, wealthy people with “service industry” income (think accountants or lawyers) would see the deduction limited.
The deduction creates a huge loophole for rich people, who could incorporate as sole proprietorships and “contract” with their employers so their income is counted as pass-through income rather than wages.
Additionally, the exemption for the estate and gift tax, the most progressive component of the federal tax code, only paid by extremely rich estates, is doubled. The alternative minimum tax for individuals, which limits tax breaks for wealthy taxpayers, is retained in more limited form. And a brand new 1.4 percent tax on university endowment income is added.
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