The Republican tax bill that’s on the brink of passage would vault America’s corporate tax rate into a much more competitive position globally and deliver temporary tax cuts to a broad range of people.
But it won’t do all that President Donald Trump and GOP leaders said it would.
Its tax cuts, including a new 21 percent corporate rate that’s down from 35 percent, aren’t projected to pay for themselves. Increased standard deductions for individual filers will bring some much-promised simplicity, but a new tax break for partnerships, limited liability companies and other “pass-through” businesses adds a dose of complexity.
Then there’s the claim—advanced most famously by Trump and Treasury Secretary Steven Mnuchin—that the bill won’t cut taxes on people at the top of the income scale. It will.
Barring unforeseen surprises, the legislation is headed for Trump’s desk by midweek. Immediately upon signing it, the president will make the bill a major flashpoint in the 2018 congressional elections. GOP incumbents will run on having cut taxes—and on other provisions in the legislation, including repealing the Obamacare individual mandate and opening up part of Alaska’s Arctic National Wildlife Refuge to oil drilling.
But Democrats—all of whom have voted against earlier versions of the bill in the House and Senate—will seek to capitalize public-opinion polls that show the legislative push has been largely unpopular.
As the last debates begin this week, here are some of the promises made about the bill, and how they stack up to reality.
Middle Class Benefits
The promise: “The greatest benefit is going to be for jobs and for the middle class, middle income,” Trump told reporters on Saturday as he boarded a helicopter en route to Camp David.
The reality: Middle-income groups will get a tax cut—as will people above and below the middle—though some individual households will likely pay higher taxes because of provisions that include the elimination of personal exemptions and a limit on state and local tax deductions.
But the greatest benefit is for corporations. The corporate rate cut will cost $1.35 trillion over the next 10 years, according to Congress’s Joint Committee on Taxation. That’s more than the estimated $1.2 trillion from individual rate cuts. Moreover, the plan’s corporate tax cuts are permanent. Most individual changes—including those for owners of pass-through businesses—expire after 2025. One change that won’t go away: The bill imposes a new annual adjustment mechanism that will push Americans into higher tax brackets more rapidly.
Mnuchin said Sunday that the bill is “all about” the middle class.
“People are going to see their paychecks go up,” he said during an appearance on CBS’s “Face the Nation.” And that’s true, in many cases. On Friday, House Republicans said a family of four earning “the median family income of $73,000 will receive a tax cut of $2,059.”
Top Earners’ Benefits
The promise: “The rich will not be gaining at all” from the tax plan, Trump said on Sept. 13. He has repeatedly said the legislation won’t benefit him, even insisting he’d be a “big loser” if it passes.
The reality: Experts say Trump and other top earners would gain considerably under the plan. Many high-earning pass-through businesses—including Trump’s many companies that own real estate assets -- would see temporary tax cuts. The estate tax exclusion would temporarily double—allowing heirs to inherit $11 million tax-free.
More than a year ago, Mnuchin said this: “Any reductions we have in upper-income taxes will be offset by less deductions so that there will be no absolute tax cut for the upper class.” Democrats quickly labeled that statement “the Mnuchin Rule.” But if it’s a rule, the tax bill breaks it.
It’s true that the bill will impose new limits on the individual deductions that many top earners use to reduce their taxable income. The state and local tax deduction will be capped at $10,000. For new purchases of homes, the mortgage interest deduction will be limited to loans of $750,000 or less.
But at the very top of the income scale, the effects of such changes were muted by a last-minute rate cut to 37 percent from 39.6 percent.
By itself, that change would save people $2,600 on every $100,000 of taxable income they earn above $600,000. (In 2015, about 18,000 top earners reported ordinary taxable income of more than $11.6 million on average, according to data from the Internal Revenue Service. Apply the proposed new top tax rate to those numbers, and the average one-year tax break for that group is more than $287,000.)
The promise: “We’re getting rid of carried interest provisions,” Trump said in October 2016 of the tax break that’s available to investment managers. Carried interest is the portion of an investment fund’s returns that is paid to fund managers. It’s treated as capital gains income, eligible for tax rates as low as 23.8 percent. During his campaign, Trump referred to hedge fund managers as “paper pushers” who are “getting away with murder.”
The reality: The tax legislation preserved carried interest, with an added limitation: Investment fund managers have to hold assets for three years—up from one year currently—to qualify for the low rate.
Largest Tax Cut in History?
The promise: “It will be the biggest tax decrease, or tax cut, in the history of our country,” Trump said on Friday at the White House.
The reality: As written, it’s not even the largest tax cut this decade. President Barack Obama oversaw a larger one—in inflation-adjusted dollars and as a share of the economy—that made permanent most of the tax cuts adopted on a temporary basis in 2001, according to the Committee for a Responsible Federal Budget.
The independent group said a $1.5 trillion net tax cut would be the fourth largest tax cut in U.S. history in real dollars, and the 12th largest as a percentage of GDP.
The promise: “We’re making things so simple that you can do your taxes on a form the size of a postcard,” House Speaker Paul Ryan told reporters on Nov. 2, a vow he and his allies have repeated throughout the year. Trump has called it “a major, major, major simplification.”
The reality: It’s not that simple. The standard deduction increase means fewer Americans will itemize—which should make things simpler for them until that change goes away in 2026. But the code overall remains intractably complex as a sea of deductions and loopholes were preserved or tinkered with.
A brand-new deduction for some business owners—one that applies only to certain types of businesses and can be calculated in two different ways that depend on employees’ wages and investments that might be decades old—will prompt at least some head-scratching.
And changes to the international tax system for corporations—which would impose new levies to try to prevent the offshoring of profit and have drawn concern from the European Union—promise ample complexity of their own.
The promise: “It’s going to be deficit neutral,” Ryan said Oct. 1 on CBS. Senate Majority Leader Mitch McConnell told Bloomberg in May: “It will have to be revenue-neutral.” In Dec. 2016, he warned “this level of national debt is dangerous and unacceptable.”
The reality: The legislation is projected to add $1.5 trillion to the deficit in the first decade. Trump administration officials and congressional Republicans have said the tax cuts will spur enough economic growth to cover that deficit -- but the JCT disagreed. Earlier versions of the legislation would still create deficits of roughly $1 trillion, the scorekeeper found, even after accounting for any growth effects.
To comply with strict budget rules in the Senate, GOP tax writers set the individual tax cuts to expire after 2025—creating a potential $100 billion dollar tax hike on individuals and families on Jan. 1, 2026, according to the JCT’s scoring.
Trump said Saturday he believes future Congresses will make the tax breaks permanent and “maybe even make it more generous.” It may take eight years to check that claim.