The Taxman Giveth (and for Some Taketh) Away in 2018
Republican-majority Congress passes the first tax reform in 30 years.
WASHINGTON — This Christmas, small-business owners like Caleb Cotter have gotten a gift from the Republican-majority Congress: tax reform that lowers his burdens.
A drywall contractor supporting his wife and small family in western New York, he told the Register that “for the first time in 10 years, I’m not stressed over taxes.”
The Tax Cuts and Jobs Act, signed Dec. 22 by President Donald Trump, is set to take effect in 2018. The law permanently lowers the corporate tax rate, adjusts individual tax rates downward, doubles the standard deduction, and eliminates the individual mandate to purchase health insurance.
Speaker Paul Ryan, R-Wis., in a speech to the House ahead of the vote, told his colleagues, “Today, we give the people of this country their money back.”
Amid the jubilation in Republican circles, the U.S. Conference of Catholic Bishops released a more tempered statement: The bishops’ conference stated the bill “achieves some laudable things,” like the improved standard deduction and increased child tax credit, but cautioned that it contained “a number of problematic provisions that will have dramatic negative consequences, particularly for those most in need.”
Away from the bustle of Washington, taxpayers like Cotter are cautiously hopeful. While he said it would be hard to know how much he would benefit until he saw his returns, Cotter’s initial impression was that his taxes would drop significantly. That gives him the freedom to raise his employees’ wages, he said, as well as save for a new home to purchase.
Although he did not vote for Trump during the 2016 election, he said, “I’m very impressed and appreciative of the impact of the legislation on me and my family.”
Father Robert Sirico, the president of the Acton Institute, told the Register that while the tax bill was “historic,” he did not consider it “utterly revolutionary.” Still, in his Grand Rapids, Michigan, parish, he said the bill had been met warmly, with a lot of gratitude for the increased child tax credit and lower tax brackets.
Thomas Cooke, a professor at Georgetown University’s McDonough School of Business, told the Register there were “exciting things” for the middle class in the bill. While the personal exemption, which was worth $4,050 per taxpayer and their dependents, was eliminated, the standard deduction has doubled to $24,000 for a married couple and would give many families a net benefit at tax time.
Families could also benefit, he said, from the doubling of the child tax credit to $2,000. Cooke credited Sen. Marco Rubio, R-Fla., and a former student of his, the president’s daughter Ivanka Trump, for their strong stance in favor of an expanded child tax credit. In addition, up to $1,400 of the child tax credit is refundable, meaning that a family with children that owes nothing on their taxes could receive up to that amount in tax rebates.
And even though the new taxes will be seen on the return filed in 2019, he said, paychecks should increase in a few months, as payroll withholding gets adjusted for the lower rates.
Cooke said families also would benefit from the expanded use of 529 savings plans. These tax-free savings plans previously could only be applied to college tuition, but now families can apply them to elementary and secondary private-school tuition.
“There’s a lot of very important aspects of this bill that will benefit, certainly in the short term, many taxpayers,” Cooke said.
But Cooke expressed reservations about other parts of the bill.
The caveat to these individual benefits, he said, is that “all of this turns to dust in 2025.” Because of the reconciliation rules under which the Senate is passing the legislation, their bill cannot add to the federal deficit outside of a 10-year window. The deficit is expected to increase nearly $1.5 trillion over 10 years due to the cuts. Because the individual tax cuts are set to expire, one study cited by Cooke showed that in 2027, 145 million taxpayers with incomes under $200,000 would see tax increases.
And with the ink barely dry on the paper, Cooke thought it was “too early” to assess the impact of lower corporate taxes on the economy.
“In eight months, are more people being hired, are plants being expanded, are wages increasing?” he asked. “If the answer is Yes, then the lowering of taxes will have a direct impact on middle-class America. But if they take the money and do stock buybacks or increase dividends, then I hardly see how that’s benefiting middle America.”
Father Sirico said that the country already was seeing companies respond positively to the bill, with AT&T, Comcast and other corporations announcing employee bonuses in light of this bill. And with more companies passing on tax savings to their employees, he said, wages should become more competitive.
The reduced corporate tax burden, Father Sirico contended, should also allow companies to become more competitive in the marketplace and pass along their savings to the families who purchase their goods and services.
“To the extent that we keep taxes down on corporations, we increase the economic productivity of American commerce, and that benefits everybody,” he said.
Will Families Take a Hit?
Others, however, have expressed concern over the tax reform’s disparate impact on families and its elimination of the personal exemption. That measure was among those aspects of the bill targeted by Bishop Frank Dewane of Venice, Florida, in his Dec. 20 letter on behalf of the bishops’ conference.
“The repeal of the personal exemption,” he wrote, “will cause larger families, including many in the middle class, to be financially worse off.” Cooke explained that weighing the new system versus the old, a family that would have had more than $24,000 in now-eliminated personal exemptions (approximately a family of six or larger) “will come out on the short end of the stick.”
Christopher Hanzeli, the director of institutional advancement for the Western Dominican Province in Oakland, California, told the Register he “can’t argue that losing the personal deduction doesn’t hurt.”
While he cautioned that he had done only preliminary calculations, he found that his family of four children would be losing out a little on tax relief under the new system and that, as his family grew, the net effect of the old personal exemption would outweigh the host of benefits available from the new tax system.
“That’s disappointing, because it means as families get bigger, tax relief gets smaller,” he said. “That’s not the message our country wants to send.”
While taxes shouldn’t influence the commitment to being open to new life and don’t influence his, Hanzeli added, “You can’t ignore the real-world impact of how losing that deduction hurts the financial bottom line.”
Bishops’ Concern for the Vulnerable
Bishop Dewane also raised concerns about other “problematic provisions” in the bill and their effect particularly on the needy. The bishops’ overall assessment of the bill, he told the Register, was that it was “fundamentally flawed,” primarily because of the “lack of care” it shows for the poor and its limited effect on assisting families, which are the “basic unit” of society.
“How much strengthening does this tax bill give to the family?” he said. “In a few places, it’s not so bad. In other places, it’s devastating.”
The working poor, he noted, would see little benefit from the bill, and “if they are getting something, that will diminish over time.” According to data from the Tax Policy Center, low-income individuals will pay more in taxes in 2027 than in 2018, while the top 1% of earners over the same stretch of time will continue to have lower taxes.
Bishop Dewane said the bishops’ conference was also concerned that the increased size of the deficit, because of the revenue loss from lower taxes, would be used as the reason to cut government-assistance programs. In a radio interview, Paul Ryan said that reforming entitlement programs like Medicare and Medicaid “are how you tackle the debt and the deficit,” and President Trump’s 2018 budget proposal includes long-term cuts to the Supplemental Nutrition Assistance Program (SNAP) and Temporary Assistance for Needy Families (TANF).
Shrinking programs that assist low-income families and individuals with housing or children’s nutrition would “put them at a distinct disadvantage,” Bishop Dewane said. Speaking especially of the impact on children, he said that if “programs begin to be cut that contribute to [their] well-being, then I don’t know what’s been done for society as a whole.”
Charitable Giving Impacted?
Hanzeli also acknowledged the uncertainty the loss of the charitable deduction was having on institutions that depend on generosity, like religious orders.
While some colleagues in his field were concerned about a decrease in giving, he said, “If you believe, as I do, that people give because they’re inherently good and feel compelled to help others, then no, this tax bill will not gut charitable giving.”
A 2016 study on charitable giving co-sponsored by Indiana University indicated that while tax considerations are a factor in philanthropy, the desire to support a specific organization comes first.
“What’s also being overlooked,” he continued, “is that the bill may actually increase giving in some ways.”
The lowered corporate tax rate has already seen some companies grow more generous. The Boeing Co., for example, after the passage of the tax bill, announced that it would devote an additional $100 million toward corporate giving, and Wells Fargo announced it would increase its philanthropic giving by 40%, to $400 million. For private individuals, Hanzeli said, the increased standard deduction and estate-tax exemption could leave them with more to give to charities.
“God has written on our hearts to be generous,” he said, “and thankfully that transcends the U.S. tax code.”
Register correspondent Nicholas Wolfram Smith writes from Oakland, California.
Tax Cuts at a Glance
In 2018, the average tax cut will be $1,600. Taxes will lower for all groups on average under the Tax Cuts and Jobs Act. Those making less than $25,000 will see a tax cut of $60; taxpayers earning between $49,000 and $86,000 would have an average tax cut of $900, and taxpayers making between $308,000 and $733,000 would receive an average tax cut of $13,500. The individual tax cuts expire after 2025.
New Tax Brackets: 10%, 12%, 22%, 24%, 32%, 35%, 37%.
New Standard Deduction: Nearly doubled from $6,350 to $12,000 for single filers and $12,700 to $24,000 for married couples. The personal exemption, though, is eliminated.
State, local and property tax deductions: Up to $10,000 can be deducted.
Child Tax Credit Doubled: Now worth $2,000, with up to $1,400 refundable.
Lower Corporate Taxes: The corporate tax rate receives a permanent cut from 35% to 21%.
Source: Tax Policy Center