Trump Tax Reform: Reducing Taxes and Creating Jobs - Research Paper

Introduction

On December 22, 2017, President Donald Trump signed the Tax Cut and Jobs Acts (TCJA) to update the Tax Reform Act of 1986 (Gale et al., 2018). The TCJA was passed to reduce taxes on the US citizens and businesses, create job opportunities, and boost the economy. The main features of the TCJA include reduced tax rates for individuals, corporate entities, localities, and states (Michel, 2017). Other elements in the law include estate tax exemptions, elimination of dependent, and personal exemptions. The rule on reduced tax rates on individuals will be valid until 31st December 2025; however, the majority of the corporate provisions of the Act are permanent. In this paper, the changes made in the Tax Act of 2017 and the resultant impacts of the tax rule are examined.

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Significant Changes Made to the Tax Provisions by TCJA

The significant changes made in the TCJA include tax changes on individuals, increased personal exemptions and standard deductions, and increased family tax credits. Also, the tax rule affected above-the-line deductions, such as moving expenses and alimony payments. Besides, changes were made to itemized deductions on local and state tax, mortgage interest, medical expenses, home equality interest, and charitable contributions. These provisions were planned to last from 2018 to the end of 2025 when they expire, and taxation will go back to how it used to be before the TCJA.

In TCJA, the tax brackets are seven just like in the Taxation Reforms Act of 1986, but the tax rates are decreased. By 2017, the tax rates in percentage for various brackets in ascending order were: 10, 15, 25, 28, 33, 35, and 39.5; between 2018 and 2025, the percentage rates are: 10, 12, 22, 24, 32, 35, and 37 ("2018 Tax Cuts & Job Act Overview," 2018). Although the tax rate remained unchanged for some brackets, for others, there was a significant reduction, which results in less tax on income. However, the tax rates will be continually adjusted to meet economic needs and to counter inflation calculated using the chained consumer price per index method. In the TCJA, personal exemptions were eliminated up to the end of 2025. However, standardized deductions were increased exponentially, almost doubling the rates that were used in 2017. For 2017, single individuals filing tax returns would take a standardized deduction of $6,350, $9,350 for household heads, and $12,700 for married couples filing together. Between 2018 and 2025, single individuals can take standardized deductions of $12,000, while household heads will take $18,000, and $24,000 for couples filing jointly ("2018 Tax Cuts & Job Act Overview," 2018). The TCJA increased family tax credits; child credits were increased to $2,000 for every child below eighteen years and set refundable amount for credits exceeding tax liability to $1,400. Under the TCJA, child credits are not affected during the calculation of inflation index; therefore, the value remains constant.

The TCJA suspended the moving expenses deductions between 2018 and 2025, except for active members of the Armed Forces. The tax plan also has a permanent effect on alimony payments; they are not included in the taxable income of the recipient ("2018 Tax Cuts & Job Act Overview," 2018). However, according to Bischoff (2019), several steps are required for the tax law on alimony payments to be effective. The divorces spouses should not live in the same household or file jointly, payments should be made in cash, and it has to be stated as alimony. Also, the recipient has to be a spouse, and payment should be made through an agreed divorce instrument. Failure to meet the requirements makes the alimony payments to be treated as child support, or contribution to shared matrimonial property (Bischoff, 2019).

The tax Act also made reforms on itemized deductions such as state and local tax (SALT); taxpayers will be able to get a deduction of up to $10,000. The TCJA changed mortgage interest deductions rule; individuals can deduct interest for debts of up to $750,000. Before the tax law became effective in 2018, people could deduct interests for mortgage debts of up to $1,000,000 ("2018 Tax Cuts & Job Act Overview," 2018). For donations made to the public, the limit on the deductions was increased by ten percent of adjusted gross income (AGI). The tax reforms also led to reduction of AGI threshold from ten to 7.5% for medical expense. Therefore, under the TCJA, medical expense deductions are made depending on the extent they exceed 7.5% AGI threshold. Nevertheless, these reforms will be active only up to the end of 2025.

The changes made by the TCJA are beneficial to businesses; the tax rates for corporates and public service corporations (PSCs) were reduced to 21% from 35%. Pass-through businesses also got a deduction of 20% of the qualified business income ("2018 Tax Cuts & Job Act Overview," 2018).

Impact of TCJA on GDP and Government's Budget

Although the TCJA is expected to cause a significant economic growth, it has little effect on the Gross Domestic Product (GDP), and a lesser impact on the Gross National Product (GNP) (Gale et al., 2018). Due to reduced tax rates on the citizen, federal revenue will reduce significantly, thereby affecting economic growth. According to Gale et al. (2018), the TCJA will increase government debts and place a burden on generations to come, if it is not financed with other taxed and spending cuts. Also, the tax Act does not favor households since it increases premiums for health care insurance but minimizes the coverage.

Effects of the Tax Rule at Personal Level

After the TCJA was passed, there was an increase in my net income due to reduced tax rates. The tax reform has had a similar effect for all members of the armed forces, just like other workers in the nation. However, we can deduct moving expenses when filing taxes, unlike other government employees. Medical insurance deductions have also increased, although the cover has not changed; therefore, the decreased tax rates attract an increase in additional expenses.

Is the Tax Rule Fair to All?

Although President Donald Trump signed the TCJA to benefit the middle-class by increasing their wages by decreasing the taxes imposed on income, the tax law does not favor all citizens of the United States. According to a CBS News article by Picchi (2018), some groups gain more from the tax rule than others. Some of the groups on the winning end include corporations, the rich, freelancers, and small businesses. The TCJA reduced tax rates for corporations from 35 to 21 percent so that they can make more profits to pay their employees more. However, most corporations channel their profits to investors in the form of dividends and buying back shares instead of paying their workers. According to the article, up to 56 percent of the profits go to investors while only six percent goes to the workers.

Similarly, the rich benefit more from the tax rule; after taxation, their net income rose by about three percent. On the other hand, the net income of the middle-class citizens in the country increased by between 0.4 to 1.9 percent. Freelancers and small businesses, sole proprietorships, for instance, are favored by pass-through deductions since only part of their income can be taxed.

According to Picchi (2018), the TCJA does not favor those from highly-taxed states such as New York, and future taxpayers. In 2018, residents of New York were expected to pay additional taxes of up to $14.3 billion, and those expecting tax refunds might have ended up owing the government. According to Gale et al. (2018), if the TCJA is not financed, the burden will be on future generations since the federal revenue gained today will have to be repaid later. Gale et al. further stated that since it is not clear how the government will finance TCJA, households might be worse off than they were before the law was introduced. Therefore, the tax rule will benefit families today but later affect the ones to come.

The Good and Bad Side of the TCJA

I believe that the tax reduction on individuals and corporates could result in higher incomes for workers, thereby meeting their financial needs. Although the tax rule on individuals is temporary, its impact will be visible while it lasts; for the permanent law on corporates, workers will be paid well, if the profits made by the organizations are managed well. The reduced tax on small businesses will also favor small-scale entrepreneurs; this will improve the economy of the country since it employs Americans.

The tax rule changes also come with challenges that make it unfavorable for all citizens of the United States; for instance, the tax reforms on moving expenses do not favor citizens apart from those in the military. Although some employers take care of the moving expenses, the employers will have to incur a higher tax bill. Limiting the mortgage interest deductions do not favor citizens since the debt limit was decreased from $1,000,00 to $750,000 ("2018 Tax Cuts & Job Act Overview," 2018).

Changes That Could Be Done to the Act

If I could make amendments to the tax law of 2017, I would restore pre-existing laws that have long-lasting positive effects on the economy of the country. Although it is a good thing that the TCJA has reduced taxes rates, the federal revenue collected should be enough to minimize national debts and ensure sustainable growth of the economy. Therefore, I would increase the tax rates on individuals, but keep them lower than the scales used in 2017. Also, the tax rule should be made permanent to ensure that its benefits do not only last for a term. Also, I would increase taxes on corporates to how they used to be before the TCJA; the reduction was meant to improve their profits, to meet the pay rise. However, the corporates started using their profits on dividends and buybacks instead of employees. Alternative means should be used to increase the wages of workers, while the tax rates for the corporates should increase.

The TCJA should be able to finance itself, to eliminate the risk of increasing federal debts, and to pass the responsibility to pay them to the future generation. Instead, the tax law should be able to be part of the solution to the economic needs of the people, and the growth of the nation.

Conclusion

Since the introduction of the TCJA in 2017, taxes on individual incomes and businesses have decreased significantly. The rule has changed not only tax rates on different brackets, but also provisions on personal exemptions and standard deductions, tax credits, moving expenses, alimony payments, and itemized deductions. Although the change in moving expense deductions has affected all other workers, it has not changed for people in the US armed forces. The tax reform is not expected to have a considerable effect on the gross domestic product or the GNP. Also, the tax law will lead to decreased federal revenue due to the reduced amount of tax collected. Apart from the moving expenses deductions, the tax law of 2017 affects members of the United States Armed Forces just like any other employee in the country. The TCJA tends to favor some groups, such as corporates, the rich, and small businesses, while citizens from high-tax states are disadvantaged. Some changes made by the tax reforms are functional; for instance, reduction of taxes on individuals and corporates can be instrumental in increasing the incomes of workers. However, other changes, such as a limitation on mortgage interest and moving expenses, have affected people negatively. The TCJA can be improved by eliminating the tax reduction on corporates since they do not benefit workers and increasing the taxes on individuals to increase federal revenue. Also, the ways should be found to ensure that TCJA finances itself to avoid national debts.

References

2018 Tax Cuts...