Research Paper on Tax Cuts and Jobs Act: Who Benefits the Most?

Introduction

The Tax Cuts and Jobs Act (TCJA) 2017 was primarily advocated for by the republicans in the House of Representatives, and by extension, TCJA was supported by the administration of Donald Trump. The Act was aimed at making significant reforms on the 1986 Tax Reforms Act, which was deemed as unfair by most taxpayers. Thus, the primary goal of TCJA was to cut taxes on various taxable elements. While the reforms were meant to benefit every taxpayer, whether individuals or corporations, not everyone benefitted from it. Critics say that the Act was only used as a tool to favor and help some individuals while punishing and increasing the burden of taxes to others. Other than individuals and corporations, TCJA had a significant impact on the United States of Americas (USA) Gross Domestic Product (GDP) and the government's budget. This paper seeks to understand the significant aspects of TCJA and assess its impacts on various issues, including the government, individuals, and corporations.

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Significant Changes Made to the Tax Provision by TCJA

Changes in Individual Income Tax

One of the significant changes made by TCJA includes changes in the individual income tax, which are intended to last up to 2025. Individual income tax, which is the tax imposed directly on income generated from employment, businesses, pensions, etc. is the primary source of the federal government's source of revenue. Therefore, changes to the income tax would significantly impact the government and its overall operations (Page et al., 2017). One of the significant changes include changes in the income level of individual tax brackets. While the total number of income tax brackets remains unchanged, i.e., seven, the ranges of incomes within the brackets have significantly changed.

In the TCJA, the tax rates for each income bracket have been reduced, and thus, individuals even in the same tax brackets are taxed at different rates. For instance, the tax rates for the highest tax bracket which was initially at 39.6% was reduced to 37%, tax rates for the second most upper bracket were reduced from 33% to 32%, that of the third bracket was lowered to 24% from 28%, 22% from 25% for the fourth bracket and 12% from 15% for the fifth bracket (Sammartino et al., 2018). Tax rates for the lowest tax bracket and that of the 35% were unchanged and remained at 10% and 35%, respectively (Sammartino et al., 2018).

Changes in Inflation Indexing

TCJA adopted Chained Consumer Price Index (C-CPI-U) to replace the traditional Consumer Price Index (CPI) as a new measure of annual inflation, which reduces the inflation rates by 0.25% and, therefore, the tax brackets increases considerably slowly (Page et al., 2017). While the reduction in taxes imposed on each tax brackets is temporary and lasts up to 2025, the use of C-CPI-U is permanent. In the long run, the change of indexation might be slow to increase the revenue collected from the income taxes, but in the long term, taxes are likely to increase since individuals are expected to move faster to higher tax brackets upon an increment in their incomes, and this implies that they would be taxed more for the higher bracket (Page et al., 2017).

Changes in Child Tax Credit

TCJA made significant changes in the Child Tax Credit (CTC), by increasing the maximum amount per qualifying child credit to 2000 dollars from 1000 dollars as per the previous tax provisions (Barro and Beebe, 2018). The refundable amount of credit for each child was also increased to a maximum of 1400 dollars, subject to the inflation index. To qualify for CTC, TCJA required that each child must have a valid Social Security Number (SSN), without which, such children would not be given CTC. Previously, SSN was not a necessity, and individuals were allowed to use their Taxpayer Identification Number (ITIN) as well as Adoption Tax Identification Number (ATIN) for CTC (Barro and Beebe, 2018). For children without the SSN, those who are full-time college students and those who are past the qualifying age for CTC but are significantly dependent on the taxpayer for financial support, TCJA provided a 500 dollar non-refundable credit. TCJA also increased the income phase-out for both those who qualify for the 2000 dollar credit and 500 dollar credit to 200,000 dollars for a single and unmarried filers and 400,000 dollars for joint or married filers (Barro and Beebe, 2018).

Changes on Standard Deduction

The standard deductions under the TCJA were increased from 12,700 dollars to 24,000 dollars for joint filers and married couples, while that of single filers was increased from 6,350 dollars to 12,000 dollars (Page et al., 2017). The standard deductions for the head of households was also increased from 9,350 dollars to 18,000 dollars (Page et al., 2017). TCJA also eliminated the 4,050 dollars personal exemption per household member, implying that those who previously benefitted from the personal exemptions such as those in large families would benefit less under the reforms (Page et al., 2017). For individuals whose overall taxable income was less than the revised standard deductions for each category, TCJA allowed them to pay nothing on the income tax.

Changes on Itemized Deductions

On the new reforms by TCJA, most of the itemized deductions were eliminated while others were significantly restricted. On the State and Local Taxes (SALT), TCJA capped the deductions to a maximum of 10,000 dollars (Page et al., 2017). Under the previous laws, there was no limitations on the deductions that one could claim. However, just like in the earlier laws where the itemized deductions covered several taxes such as real estate properties and sales, among others, but one could only claim one deduction, TCJA also offers tax deductions on a range of items, but one can only claim a deduction for one thing. For married couples who file their returns separately, they will only be entitled to a tax deduction of up to 5,000 dollars each, while for single and head of household filers, they are allowed to claim tax deductions of up to 10,000 dollars (Page et al., 2017). Additionally, TCJA eliminated the foreign real property tax deductions.

On mortgages, TCJA reduced and limited the deductions of interests on home mortgage debts to 750,000 dollars for loans used to acquire the first residence for single filers and 375,000 dollars for married couples (Sammartino et al., 2018). Previously, the deductions were only made on interests of mortgage loans of up to 1 million dollars on the first or second residence for single filers or 500,000 dollars for married couples (Sammartino et al., 2018). On medical expenses deductions, TCJA reduced the percentage of the deductions that filers could claim from their adjusted gross income to 7.5% from the previous 10% (Sammartino et al., 2018).

Impact of TCJA on GDP and Government's Budget

TCJA had a significant effect on the government's budget and the GDP since TCJA aimed at reducing taxes, especially the income taxes, which are the primary source of government's revenue (Page et al., 2017). According to the Joint Committee on Taxation (JCT) and Congressional Budget Office (CBO), it is estimated that TCJA would considerably reduce the revenues and consequently reduce the government's budget. JCT estimates that within ten years since the implementation of TCJA, the government's budget would fall by 1.65 trillion dollars (Page et al., 2017). The reduced budget would then eventually lead to an increase in deficit by at least 1.4 trillion in a decade (Page et al., 2017).

On the GDP, TCJA is expected to raise and improve the economy in the short-term by creating several incentives to invest and save, but in the long run, it is projected that the law would negatively impact the GDP. It is also estimated that the reforms would lower the Gross National Product (GNP) more than it would reduce the GDP since the law is mostly biased towards foreigners and foreign investments. CBO projects that while the GDP might increase by 0.5 in a decade following the implementation of the law, only 20% of the increase would be accrued from local citizens while the rest will be collected from abroad (Page et al., 2017). Thus, CBO estimates the GNP to increase by only 0.1% margin in a decade (Page et al., 2017).

Further, CBO projects that the percentage of tax revenues on the GDP would decrease from 17.4% from 1962 to 2016, to 16.7% from 2018 to 2022 (Carrizosa et al., 2019). By 2028, CBO estimates that the percentage of tax revenue on the GDP would have increased to 18.5%, but should the provisions period be extended beyond 2028, then the rate would drastically fall to 17.5% (Page et al., 2017). Even though the tax revenues are expected to increase in the decade, the projected government spending is expected to increase by 3% from 20.6% of GDP in 2018 to 23.6% of GDP by 2028 (Carrizosa et al., 2019). As such, the spending is expected to increase faster than economic growth, which would then increase the public debt and deficit.

Impact of TCJA on A Personal Level

The changes by TCJA have considerably affected me in various aspects, both positively and negatively. To begin with, with the new reforms on standard deductions, my taxable income has significantly decreased as a result of the increment in standard deductions. Additionally, the changes in standardized deductions have enabled me to save time and money, which I previously used on paying tax advisors to help me file the itemized deductions. With the standard deductions, the process is fast, and one does not require a tax advisor. While I have benefitted from the standard deductions reforms, I have equally lost on the personal exemptions which have been eliminated by TCJA. Before the changes, my large family and I used to enjoy the benefits of personal exemptions, which have been scraped off in the new reforms.

Is TCJA Fair to Everyone?

TCJA, just like any other reform, does not benefit everyone equally. Some groups tend to help more than others while others lose. For instance, the changes tend to favor large businesses more than small businesses. The elimination of several deductions by the reforms that previously supported the operations of small companies may negatively have an adverse effect on small businesses. For instance, previous deductions on unreimbursed business expenses such as travel costs for businesses enabled small businesses to cater for the expenses smoothly. With the elimination of the deductions, small companies are likely to struggle, which would consequently incentivize employees from working for small businesses. Instead, employees will prefer to work for large companies that can afford to fund such expenses even without the deductions (Cline, 2018).

Additionally, the 20% deduction on taxable income for pass-through may not favor all small businesses. While some small businesses might qualify for the deductions, small businesses primarily in professionals such as doctors and lawyers, among others, who often earn high amounts might not be eligible for the deduction (Cline, 2018). Moreover, even the small businesses that qualify for the 20% deduction might not receive the actual 20% deduction and may receive a deduction that is much lower (Cline, 2018). Under the TCJA reforms, the corporate rate cut was effected at a 40% rate while that of small businesses was effected at a rate of 9% only (Cline, 2018). The rate reductions for the corporates were made permanent, while those of small businesses were made temporarily (Cline, 2018). From the above reforms, it is evident that TCJA favors one group, i.e., the corporates and large businesses over small businesses.