If the Tax Cuts and Jobs Act does not pass by the end of the year, it will be disastrous for the Trump administration. While President Trump could have focused on bipartisan issues such as infrastructure, he instead chose to focus on extremely partisan and highly controversial issues such as health care and tax reform. President Trump’s efforts to repeal and replace the Affordable Care Act were embarrassingly unsuccessful. If this tax reform bill does not pass, President Trump will have nothing to show for his first year in office.
With this in mind, is it even necessary for President Trump to pass a tax reform bill? The new reforms proposed will eventually negatively affect the American middle class. The House of Representatives has already passed its version of the tax reform bill. In order to make this bill a part of ongoing legislation, the Senate needs to pass the exact same bill that the House did. However, the bills that the Senate and House have put forward seem to vary greatly. Moreover, the House’s passing of the tax reform bill reeked of desperation. The House tax bill, which was over 400 pages long, was not reviewed at a single House hearing prior to being passed, which happened against the wishes of 13 Republicans and all Democrats in the House. Unlike in the House, the Senate can only afford to lose the support of two Republicans, assuming the Democrats will be unified in their efforts to shut down the Senate tax bill.
The House bill has chosen to simplify the tax code by collapsing the seven tax brackets to four tax brackets: 12 percent, 25 percent, 35 percent and 39.6 percent. These tax brackets are representative of the different income levels and how much tax an individual with a particular income has to pay, according to the tax bracket they fall under. The Senate bill, however, has chosen to remain with the original seven-tax-bracket system (12 percent, 22 percent, 24 percent, 32 percent, 35 percent and 38.5 percent for high-income individuals and married couples). Simplifying the tax code is, in theory, a good concept because people will better understand how their money is being used. That being said, simplifying the tax brackets will only be harmful to the American middle class because a tax bracket is representative of the percentage rate one pays when they fall within an income bracket range. With more tax brackets, people are able to pay taxes that more accurately reflect their income. For example, it would not be ideal to tax someone who earns $20,000 annually the same as someone who earns $60,000 annually.
Additionally, the House and Senate tax bills differ in the time in which they are in effect. The House bill wants to make tax cuts for corporations and individuals permanent, whereas the Senate wants to implement the corporate tax cuts by 2019 and ensure that the individual tax cuts expire by 2025. The Senate bill also attempts to repeal the Affordable Care Act, thereby saving $300 billion but also taking away health insurance from millions of Americans. The House bill does not include this provision; however, it could be easily added.
The Senate and House bills do coincide on several issues. The mortgage interest deduction from $1 million to $500,000 would definitely be a big win for both the House and Senate Republicans. Similarly, the Republicans are united in their efforts to give small businesses a tax break so that they have better chances of success.
Both these tax reform bills have one thing very much in common: they hurt blue states much more than they do red ones. As Daniel Donovan, a Republican congressman from Staten Island, said, “There was a study showing four states will end up paying 16 billion dollars more in taxes, and 46 states will pay less.” Donovan added, “Those states are New York, New Jersey, California and Maryland. Those are the people that are subsidizing this tax break for the rest of America.” Moreover, this tax bill could have the most overwhelming impact on the middle class American taxpayer in every state. This would happen as a result of the elimination of personal exemption, where the money a family is allowed to deduct from their income corresponds to the number of taxpayers and dependents claimed. At present, married couples can deduct approximately $4,000 from their taxable income per family member. The elimination of personal exemptions will cause $1.6 trillion in tax increases over the next decade.
Michael Linden, a tax-policy fellow at the Roosevelt Institute, has studied the tax legislation in detail. Linden told Sheelah Kolhatkar from The New Yorker that “it is a flat-out lie that everyone gets a tax cut. There will be people who pay more in taxes in every state, in every district. The reddest state in the country, and the reddest district in that state, will have people who pay more in taxes.” Michael Linden is just one of the many scholars in this field who emphasize the need to adjust the tax system, but not in the way that the Republicans have put forward. Yes, we do need to simplify our tax code. It will definitely make it easier for the average American to understand and to incorporate. However, simplifying the tax code does not necessarily mean making it fundamentally more harmful for the average American taxpayer, and that is what this tax reform bill does.