The first Tax Day under the new Tax Cuts and Jobs Act has now come and gone but Americans have actually been living with it since it was passed in 2017. But since economists are STILL publishing research findings from their studies on last comprehensive tax overhaul back in 1986 when Reagan was president, it’s likely that data about exactly how this is affecting us will be rolling in for years to come. Here’s what we know so far.
1. Corporate taxes went down. WAY down.
The Tax Cuts and Job Act’s sharp drop of the corporate income tax rate, from 35% to 21%, was one of its main components. Plenty of companies never paid that full rate because of exemptions, but the big drop still amounted to a big chunk out of corporate tax collections. They went down from annual rate of $264 billion in the fourth quarter of 2017 to $149 billion the next one and still haven’t recovered.
One important thing to note is that this is the first time corporate taxes have taken such a hard hit in the absence of a recession. The Congressional Budget Office predicts that corporate income tax revenues will steadily increase in the coming years, but suggests that they certainly won’t “pay for themselves,” as their Republican supporters said they would.
2. The short term economics boost we’ve seen? It won’t last.
Many economists predicted that the tax cut plan would give the economy a boost right off the bat, with an increase into business research, development, factories, and equipment attributing to that boost. In theory, things like better factories with better equipment leads to better productivity and hopefully, therefore, better wages.
But while wages did increase toward the end of last year, particularly for those with a lower income, there was also an increase in minimum wage in many states and a tight labor market as a result of nearly a decade of steady job growth. Furthermore, most economists expect US economic growth to decline to about 2.1% to 2.3% in 2019, partly because they believe that some of the growth is due to a rise in oil prices which drove a significant amount of domestic activity.
While the White House’s Council of Economic Advisers used the boost in 2018 to call the Trump tax plan a success, advisers both in and out of the White House warn that this type of plan takes years to play out. CEA Chair Kevin Hassett told CNN last week,
“We were the highest taxed place on earth. Now we are not… The adjustment to having all the industry come home is not something that happens overnight, it spreads out over three to five years.”-CEA Chair Kevin Hassett
3. Rich people gained more than poor people did.
According to a March report from the congressional Joint Committee on Taxation, about 66% of taxpayers saw their federal tax bill decline by more than $100 in 2018 and total liabilities are down 25%, says H&R Block. But all that depends on exactly how much money you make.
The breakdown: households earning between $500,000 and $1 million will see an after-tax income rise by an average of 5.2% while households making less than $50,000 will see only a 0.6% increase. This partly because of a provision in the plan which allows taxpayers that earn money through “pass-through” businesses to take a 20% deduction of that very income. Jason Oh, a tax law professor at the University of California-Los Angeles says this:
“The people who are benefiting the most, and the people who are benefiting the most through pass-throughs, are really rich people.”-Jason Oh, tax law professor at UCLA
Many believe this current tax plan is skewed toward the wealthy and will therefore only widen the inequality gap which has led 46 Senate Democrats to back a bill that would increase subsidies for children and earned income. With several Presidential candidates endorsing similar plans, if 2020 sees a Senate and White House flip, this could be a law.
4. Other impacts? Too soon to tell.
What we do know is that the 2017 tax overhaul garnered one of two reactions from special interests, pleased or dismayed and with this being the first year where it will fully come into effect, it may be awhile before we know which of these reactions was warranted.
For instance, the housing market can be so fickle, feeling impact from everything from the price of materials to mortgage rates, it will take longer to tell what a single provision will do for it. The same can be said for state and local tax deductions, meaning so far, it’s hard to say whether or not the plan has had that much of an effect yet. It’s important to look at this with a broader perspective says Oh, of UCLA, warning,
“The thing that’s related that I’m more concerned about is, we will eventually face another recession… And what we’ve done through the Tax Cuts and Jobs Act is use a bunch of the tools that we need to deal with the next recession, at a time when we don’t have a recession.”-Jason Oh, tax law professor, UCLA