The House Republican tax bill unveiled today is like a just-completed airplane rolling out of its hangar. Soon lobbyists and lawyers will pick over its provisions and try to salvage parts seen as critical to its clients. For now, all we have is the current blueprint, which will likely grow more forgiving to powerful interests. And it’s already extremely generous on that front.
Here are some of the main features of the bill, known as the “Tax Cuts and Jobs Act,” which really isn’t that much better than the “Cut Cut Cut Act,” Donald Trump’s favored title. It reduces the number of income brackets from seven to four, keeping the top marginal tax rate at 39.6 percent but increasing the threshold for that to $500,000 for individuals and $1 million for couples. It cuts the corporate tax rate from 35 to 20 percent and, while some business deductions are eliminated to make up for that, others are expanded. It does away with the estate tax, doubling the threshold to start and then phasing it out over six years. And it repeals the Alternative Minimum Tax, which affects high-income households.
These are raw giveaways to the richest people in America, who see more favorable rates on much of their income, no restrictions on passing their money to heirs, and significant drops in the rates for the corporations they own and invest in. On the flip side, there’s almost nothing here for anyone in the lower tiers of income. Sure, the doubling of the standard deduction will shield up to $24,000 for a couple from taxation; but rates actually go up on the first $18,000 of income. Those who already don’t pay anything in federal tax still won’t, but there are no new refundable tax credits to increase their benefits. A $300-per-person family credit phases out after five years. The Child Tax Credit is enhanced, but new indexing for tax brackets that will make taxes marginally more expensive over time will offset that. Overall, the help the middle class will see in this bill pales in comparison to the gifts for the rich.
There are also two important pieces of the bill that could open up huge loopholes for the wealthy and corporations to shelter even more of their money. The bill reduces the tax rate for “pass-through” income, earned from businesses like partnerships, to 25 percent. This creates incentives for the rich to set up corporations and take advantage of that far lower rate. The bill also converts to a territorial tax system, which doesn’t tax corporations on income earned overseas. Presently the United States does tax foreign income, but only when it’s brought back to the United States, which many corporations fail to do. The incentives here run in the direction of claiming as much income as possible was earned overseas—for example, through patents or other intellectual property registered in a low-tax foreign country. Tech firms and pharmaceutical companies practice this consistently, and others will surely follow their lead if the law changes.