Tax Reform Plan from Republicans is More Radical Than You Think

A tax form at the main post office in New York City on April 15, 2009. President Donald Trump and his allies are aiming to shift the tax burden from businesses to individuals. Chip East/reuters

The tax cut plan issued by congressional Republicans and blessed by President Donald Trump is more radical than could have been expected, considering the buzz leading up to it. That's because it puts much more of the burden of paying for government on individuals and far less on business.

"We are following the Reagan example here. Go bold. Listen. Make adjustments but keep the process going forward," said Representative Kevin Brady of Texas, a Republican who is chairman of the House Ways and Means Committee.

The plan didn't do some of the things that were feared. It wound up preserving some of the cherished middle-class tax breaks, such as the deductions for contributions to retirement plans, including 401(k)s, which congressional Republicans had considered removing—a move the White House rejected. But the plan cuts the corporate tax rate dramatically, to 20 percent from 35 percent, a lower figure than many observers anticipated. Many smaller businesses, such as a Schedule C or sole proprietorship, would be eligible for a pass-through rate of 25 percent.

But the rich would get some huge breaks. The estate tax, which now kicks in only for couples with $11 million in assets, wouldn't kick in until an eye-popping $22.4 million.

"The most striking aspect of the GOP tax proposal is the skewing of its benefits in favor of corporations and wealthy individuals, rather than middle-income families," said Duke University law professor Lawrence Zelenak, an expert on tax law and policy. "For example, while the proposal cuts the tax rate for corporations almost in half and repeals the estate tax, the proposal actually reduces the per-child tax benefits by several hundred dollars for many middle-income families."

It's true that the plan proposes to pare back some deductions for the upper middle class. The mortgage-interest deduction is capped for loans over $500,000, which constitute a small minority of mortgages: only 5 percent of them nationwide, according to an analysis of data from 2012 to 2015 by the National Low Income Housing Coalition. Existing loans are grandfathered in. State and local tax deductions are gone, but you can deduct property taxes up to $10,000. (This is a blow to high-end urban renters who itemize and can't deduct property taxes or state and local income taxes.)

The plan creates three tax brackets, 12 percent, 25 percent and 35 percent, and also keeps a top rate of 39.6 percent for the highest earners, reducing the total number of brackets from seven. The brackets include single persons earning up to $24,000, who would pay no income tax; up to $90,000, who would be in the 12 percent bracket; up to $260,000, who would be in the 25 percent bracket; and up to $1 million, who would be in the 35 percent bracket. Those making more than $1 million would be in the 39.6 percent bracket, which is currently the top rate for millionaires.

Critics note that there are plenty of other ways wealthier earners would do well.

"Keeping the top tax rate at 39.6 percent for millionaires is a cosmetic change meant to make this tax plan more palatable. Unless tax writers take out other provisions that almost exclusively benefit the highest-income households, millionaires will still benefit most," said Alan Essig, executive director of the Institute on Taxation and Economic Policy.

"The framework calls for eliminating the estate tax, a tax that only the richest 0.2 percent of taxpayers pay," he continued. "It would lower the corporate tax, which primarily benefits wealthy investors. And it would lower the tax rate for pass-through business income, creating a gaping tax loophole that will incentivize the wealthy to claim ordinary income as business income to pay a lower tax rate."

There are particularly harsh blows for some groups. Student loan interest would no longer be deductible. The medical expenses deduction that's currently available to itemizers with super-high health costs would be scrapped.

The plan, if enacted, would move the U.S. much closer to a system that places the tax burden on individuals and leaves businesses exempt. It's telling that while many of the benefits to families are temporary in the bill, such as an increase in the Child Tax Credit to $1,600 from $1,000, the cut to the corporate tax rate is permanent.

Republicans had a difficult balancing act. They couldn't let the bill expand the deficit by more than $1.5 trillion because they were bound by a budget resolution that allows them to pass the bill with a simple majority of votes. They had to constantly find ways to pay for cuts. What they wound up with is something that greatly benefits business and wealthier taxpayers.

For instance, the bill would abolish the Alternative Minimum Tax, which the government uses to try to recoup income from higher earnings. In 2005, Donald Trump paid the bulk of his taxes, some $31 million of the $38 million he owed, on $150 million in income because of the AMT, according to partial returns obtained by The Rachel Maddow Show.

While some industries are upset by the plan—especially homebuilders and those in real estate wary of the mortgage-interest deduction changes—big-business groups seemed especially elated by the Tax Cuts and Jobs Act.

"This bold tax reform bill is exactly what our nation needs to get our economy growing faster. A lot of work remains to be done to get the exact policy mix right and move from a legislative draft to an enacted law. We share Chairman Brady's commitment to permanent reform because temporary tax relief simply will not produce the pro-growth environment we all desire," said Chamber of Commerce Senior Vice President and Chief Policy Officer Neil Bradley in a statement Thursday.

But by Thursday afternoon the National Federation of Independent Business was balking. "This bill leaves too many small businesses behind," said NFIB President Juanita Duggan. "We are concerned that the pass-through provision does not help most small businesses. Small business is the engine of the economy. We believe that tax reform should provide substantial relief to all small businesses, so they can reinvest their money, grow and create jobs."

The measure won plaudits from Grover Norquist, head of Americans for Tax Reform, whose approval is politically weighty. "The tax reform bill is a tax cut and a jobs bill. Growth. Growth. Growth. Long overdue. Great news for taxpayers and those left behind by eight years of slow growth under Obama," he told the Financial Times.

Not surprisingly, Democrats were outraged. "What we are seeing today is a plan that exacerbates the unfairness and inequality in our tax code," Senator Chuck Schumer said on the Senate floor.

The prospects for passage are tricky. While Republicans understand the political necessity of passing a bill, especially after their failure to repeal and replace the Affordable Care Act, it will still be a difficult sell. Senator Marco Rubio, the Florida Republican, was critical of the package for not allowing a bigger break for working families.

Republicans are hoping to have a vote on the bill in the Ways and Means Committee as soon as next week.