Republicans unveiled their bill to overhaul the U.S. tax code Thursday morning, and there were some major winners and losers.
The top GOP tax writer, House Ways and Means Committee Chairman Kevin Brady (R., Texas) foreshadowed just how hard it would be to craft the biggest re-write of the tax code since 1986 when he said in August: "Tax reform is hard. It's the challenge of a generation."
Here's a rundown of who is happy and who isn't as the details emerge regarding the "Tax Cuts and Jobs Act," the centerpiece of President Trump's "MAGAnomics" agenda.
Big corporations: America's mega businesses are getting a substantial tax reduction. The bill cuts the top rate that large corporations pay from 35 percent to 20 percent, the biggest one-time drop in the big business tax rate ever. On top of that, companies get some new tax breaks to help lower their bills such as allowing businesses to deduct all the costs of purchasing new equipment, as well as a special low rate on any money they bring back to the United States from low-tax countries such as Ireland. Many businesses have been holding cash overseas to avoid 35 percent U.S. taxes. Now they get to bring the money home at a tax rate of 12 percent. The entire business tax system is also changing from a worldwide system in which money anywhere around the globe is taxed to a territorial system in which it's mostly money made in the U.S. that is taxed. Businesses have long lobbied for this change.
The super rich: The estate tax, often called the "death tax" by its critics, is going away by 2024, meaning wealthy families will be able to pass on lavish estates and trust funds to their heirs completely tax free. At the moment, only estates worth over $4.49 million faced the estate tax. The mega wealthy also get to keep charitable deductions, a popular way to lower their tax bills, and they no longer have to pay the alternative minimum tax (AMT), a safeguard against excessive tax dodging that's been in place since the 1969.
Anyone paying the AMT: The bill eliminates the Alternative Minimum Tax, which forces people who earn more than about $130,000 to calculate their taxes twice, once with all the deductions they can find and the AMT method, which prevents most tax breaks. The AMT was created in 1969 to prevent the rich from excessive tax dodging. There is perhaps no better example of how much this will benefit the rich than that fact that Trump himself would have paid $31 millions less in taxes in 2005 (the one year for which we have his tax returns) without the AMT.
Hedge funds, doctors and lawyers: Many wealthy Americans hedge fund managers, doctors, lawyers and consultants will get a sizable discount on their taxes. The top individual tax rate is 39.6 percent, but under the GOP bill, high earning small business owners will only pay a tax rate of 25 percent on 30 percent of their business income. This is a so-called "pass through" business rate. On the campaign trail, Trump also said that hedge funds were "getting away with murder" on their taxes and that he would take away carried interest, the popular loophole in the tax code these Wall Street titans use. But the bill does not change or eliminate carried interest, which is also used by some real estate developers.
Home builders: The legislation would cut in half the popular mortgage interest deduction used by millions of American homeowners, changing the deduction's rules for new mortgages. Presently, Americans can deduct interest payments made on their first $1 million worth of home loans. Under the bill, for new mortgages, they would only be able to deduct interest payments made on their first $500,000 worth of home loans.
Home builder stocks are plummeting as a result, since many builders make a lot of their money from constructing high-end mansions. In addition to capping the mortgage deduction, the bill also caps the state and local property tax deduction to $10,000 a year, another hit to higher-end homeowners. That said, many economists and even some Democrats think these limits are a good idea because the housing incentives in the current tax code favor the wealthy. The National Low Income Housing Coalition says mortgages over $500,000 are rare: Only 5 percent of mortgages are more than that amount.
(Some) small business owners: The National Federation of Independent Business, which represents 325,000 small businesses, said it would not support the GOP bill because it "leaves too many small businesses behind." The original idea was to lower small businesses taxes to 25 percent, but the actual language in the bill only allows small business owners to pay 30 percent of their business income at the 25 percent rate. The rest would be paid at the business owner's individual tax rate. Any individual earning over $200,000 a year (or couples earning more than $260,000) would pay the rest of their taxes at a rate of 35 percent.
People in high-tax blue states: Say goodbye to most of the state and local tax deduction ("SALT"). Over a third of filers in many Democratic states like California, New York, New Jersey and Connecticut claim the SALT deduction on their returns. Under the GOP plan, people will still be able to deduct up to $10,000 on the property taxes they pay locally, but they will no longer be able to deduct the other taxes they pay to state or local governments from their federal tax payments.
The working poor: While the bill includes lots of tax breaks for big businesses and the rich, the bottom 35 percent of Americans do not get any extra benefits, according to Lily Batchelder, who served on President Barack Obama's National Economic Council. They already have a $0 federal tax liability. Some argue a more tax system would increase the credits (money back) that lower-income families get, especially those that work low-wage jobs. The GOP preserves the Earned Income Tax Credit, a popular refundable credit for the working class, but the bill does not expand it.
Charities: The National Council of Nonprofits warns that charitable deductions are likely to go down under this bill. While the GOP enables the wealthy to continue deducting their charitable giving, many middle and upper middle class families will no longer get that tax break because they probably will stop itemizing their deductions. At the moment about 30 percent of Americans itemize, but under the GOP bill, the standard deduction is roughly doubling from $6,350 to $12,000 for individuals and $12,700 to $24,000 for married couples, meaning fewer people will probably itemize. The GOP argues that middle class people should end up giving more to charity since they will pay less in taxes.