A 500-page long Republican tax bill, with numerous and significant last minute changes – as well as some illegible handwritten edits in the margins – cleared the U.S. Senate in the early hours of Saturday morning, by a 51-49 margin. We are now one step closer to a tax system that benefits the country’s wealthiest individuals and adversely affects the rest of us.
While we wait for the Senate and House versions of the bill to be reconciled, let’s review some of the most egregious provisions of this tax reform – which was originally campaigned as a tax cut for everyone:
Significant reduction of the corporate tax rate
Proponents of the new tax bill claim that it will “restore American competitiveness” by reducing the top corporate tax rate from 35% to 20%. This thinking ignores the reality that all large corporations currently utilize deductions and tax loopholes to reduce their effective tax rate to well below 35%, and that they tend to use extra cash for stock buybacks and dividends – not to expand their workforce or increase wages.
Favoring passive business investors over active workers
A significant provision of the tax bill is the cap on taxes for business profits at 25%. What most people don’t realize, however, is that this will only benefit a company’s passive investors. Extremely wealthy individuals can live off their investment income – the rest of us earn our living by the sweat of our brow.
For example, if you are a middle class worker in a company you will pay tax at your regular tax bracket (up to 39.6%). The company’s investors – who could be earning millions of dollars each year – will have their taxes capped at 25%. If one of those investors chose to roll up their sleeves and get more involved in the operations of the company, they would lose their “passive” status and be penalized for their increased involvement!
Elimination of numerous deductions that benefit the middle class
Under both the House and Senate bills, many itemized deductions that currently benefit the middle class would be eliminated or reduced, including:
- The medical expense deduction
- The property tax deduction, which might to be capped at $10,000
- The mortgage interest deduction, which the House bill reduces to $500,000 for new homes (and for primary residences only), and which the Senate bill keeps at $1,000,000 (with no deduction for equity debt/refinances). While most Americans will not be affected by this, people residing in states with high property values – in which the mortgage interest deduction is a strong consideration in pricing – are likely to see a substantial drop in the fair market value of their homes.