With the new tax law approaching its 10th month in existence, the immediate effects have yet to completely materialize for many Americans. However, with the end of the year approaching, people are starting to think about that first tax filing under the new law, and with so much debate over the bill, the impacts aren’t necessarily going to be clear.
However, any piece of legislation is going to have winners and losers, people who stand to benefit significantly more or less from its passage, and this tax bill is no different. Some key shifts in how the American economy and the American people are taxed are likely to spread potential benefits in very different ways.
One of the biggest changes in the tax bill was to slash the corporate tax rate from 35 percent to 21 percent, reflecting a trend around the world toward reducing the rate at which businesses are taxed. This might have been overdue, and the new rate means the U.S. goes from one of the highest corporate tax rates in the world to just below the worldwide average.
Regardless of whether you think it’s a good policy or not, having fewer taxes means profitable businesses large and small can keep more of their cash and reward shareholders.
Winner: Businesses Storing Cash Overseas
One offshoot of that 35 percent corporate tax rate was that it created a clear incentive for companies that had earned money overseas to keep it there rather than repatriate profits and lose over a third of those profits to taxes due. An estimated $2.6 trillion currently sits in foreign bank accounts. However, the new tax bill allows corporations to start repatriating some of that cash and pay a one-time tax of 8 to 15.5 percent. Companies took advantage, bringing home some $465 billion in the first six months of 2018.
Winner: Rich People
If you’re a top-earner, odds are you’re going to like the looks of your 2018 tax return. The new bill cut the top tax rate from 39.6 percent to 37 percent.
It doesn’t stop there, though: The cuts in the corporate tax rate and the one-time tax holiday on cash held overseas is most likely benefiting the richest Americans the most. That’s because the majority of the additional money flowing to corporations is getting directed to their shareholders, something that should disproportionately benefit the wealthy. The record $242.1 billion in share buybacks announced during the first quarter of 2018 was broken by the amount of the next three months: $436.6 billion.
And on top of all that, the exemption for the estate tax was lifted from $11 million to $22 million, giving plenty of multimillionaires the chance to escape taxes when passing their estate on to the next generation.
A rash of changes to the tax code means a lot of people are going to need more help understanding their tax filings in the coming year, something that should boost the bottom line of many accountants nationwide, even if the new rules do prove simpler in the long run.
Winner: President Donald Trump
Aside from having a signature piece of legislation he can point to from his first term, President Donald Trump stands to benefit directly from changes in how money from “pass-through” entities are collected, not to mention the reductions in the top income tax rate and the corporate tax rate.
Previously, “pass-through” income — money earned by partnerships or businesses that is kicked up to the owners — was taxed at the individual tax rate. This means people like Trump or Jared Kushner — who both have ownership stakes in major real estate companies — would have originally owed 39.6 percent on the money earned from their company’s properties. Under the new bill, that rate could come in under 30 percent.
Loser: People Using Healthcare Exchanges
If you’re one of the 20 million Americans who signed up for healthcare following the passage of the Affordable Care Act in 2010, the repeal of the individual mandate contained in the tax bill is probably not great news. That’s because the people most likely to drop their insurance without the looming tax penalty are the healthiest people. So, with a more expensive pool of potential customers now in the exchanges, insurance companies will likely raise premiums to make up for lost profits.
The Congressional Budget Office (CBO) predicts premiums will go up about 10 percent as a result, and about 13 million fewer Americans will have healthcare by 2027.
Loser: Not Rich People
Even though the Republicans who passed the tax bill clearly disagree with this assessment, the tax cuts are likely to benefit the wealthiest Americans more in both the short and long term. So, whereas a single business owner with an income of $250,000 can expect to pay $14,484 less than they did for 2017, a middle-class family of four earning $75,000 is only going to see their bill decrease by $2,119 and a low-income family of four earning $30,000 a year will pay just $817 less.
Be Realistic: Why You Shouldn’t Assume You’re Getting a Tax Refund
Loser: The Federal Deficit
The CBO pegged the cost of the new tax law as a whopping $1.455 trillion over the next decade, meaning the deficit only looks to be getting larger because of this bill. And though some claim that economic growth will ultimately cover that amount, plenty of economists disagree and think the tax cuts will create over $1 trillion in debt for the U.S. government by 2027.
Losers: Residents in States With High Taxes
You used to be able to deduct any local property and income taxes from your federal tax bill, but those deductions are now capped at $10,000. So, if your state tax bill is on the high side, you might not be able to use that to reduce the cost of your federal taxes, meaning residents in the states with the highest tax rates could be in for a rude surprise.
Loser: Whoever Wins in 2020
The extended period of economic growth that can be traced all the way back to the end of the last recession has to end at some point. What’s more, if and when the next recession hits, the huge hole in the federal budget created by the tax cut is likely going to make it harder to stimulate the economy either by increasing spending or cutting taxes even more.
That all adds up to a recipe for political disaster for whoever wins the presidential election in 2020, as they’re most likely going to be facing a dire economic picture with less room in the budget to address it.
Winner or Loser: The American People?
So how will the American people fare based on this new tax bill? It’s impossible to say at this point, but it’s clearly something pundits and prognosticators will be tracking closely for years to come.
Proponents of the tax bill think that putting more money in the hands of corporations and consumers will help keep the current pace of economic growth high in both the short and long term. However, the bill’s detractors would observe that if the economic growth created falls short of what Republicans are touting, it could mean boosting federal debt levels to line the pockets of multimillionaires and huge corporations all on the eve of a looming recession.
Only time will tell, and it might never be completely cut and dry, but it’s certainly something for all Americans to keep an eye on.
Click through to read about medical expenses that you can deduct from your taxes.
More on Taxes
- Did the New Tax Law Help or Hurt Ordinary Americans? Taxpayers Share Their Stories
- 10 Brilliant Ways to Reduce Your Taxes in Retirement
- Tax Deductions 2018: 42 Tax Write-Offs You Don’t Know About
- Watch: Which Tax Receipts Should I Be Savings to File Taxes?
About the Author
Joel Anderson is a business and finance writer with over a decade of experience writing about the wide world of finance. Based in Los Angeles, he specializes in writing about the financial markets, stocks, macroeconomic concepts and focuses on helping make complex financial concepts digestible for the retail investor.