They finally did it: On Dec. 20, Republicans in Congress passed a historic and massive tax cut for corporations, alongside modest tax cuts for high income earners and regular Americans. The cuts are expected to increase the federal debt by $1.46 trillion over the next 10 years (it currently stands at $14.9 trillion). The bill passed the Senate by 51-48 and the House by 224-201, with no votes whatsoever from Democrats, and 12 House Republicans also voting against it. President Donald Trump signed it into law Dec. 22.
The heart of the package is the largest one-time reduction in the corporate tax rate in U.S. history. The nominal corporate income tax rate now drops to 21 percent (from 35 percent previously). That cut amounts to $1 trillion over the next decade.
The package also lowers income taxes for millionaires: The federal top marginal tax rate decreases from 39.6 to 37 percent — for taxable income above $500,000. That amounts to a $32,500 a year tax cut for the top 1 percent, and a $148,000 a year cut for richest one tenth of a percent of income tax payers.
The law schedules the individual tax cuts to expire after 2025, but not the corporate tax cuts.
Lowering the rates of income taxes on the rich is likely to worsen the rising inequality in the United States.
The 500-page tax package contains other notable elements:
- Lowers the tax on millionaire estates. Under current law, Americans can pass up to $5.5 million to their heirs tax-free. The new law doubles the threshold, so now the first $11 million of property, stocks and other assets won’t be taxed ($22 million for married couples).
- Limits deductions for state and local taxes. Americans formerly could deduct all of what they paid in state and local taxes from the taxable income they report to the IRS. Going forward, those deductions will be limited to $10,000 per tax filer.
- Doubles child tax credit. The child tax credit will now be $2,000 per child.
- Ends the individual health insurance mandate. Starting 2019, the new law ends the $695 per adult tax penalty that the Affordable Care Act imposed on uninsured individuals.
- Eliminates the corporate alternative minimum tax. Lawmakers long ago realized that some tax filers had become so skilled at milking tax breaks that they paid no tax at all even when highly profitable, so Congress passed an alternative minimum tax formula to rein that in. That goes away in the new law.
- Raises the alternative minimum tax threshold for individuals. Last year, the alternative minimum tax for personal income tax payers kicked in for individuals earning over $120,700 and married couples earning over $160,900. Under the new law, that threshold is lifted to $500,000 for individuals and $1 million for married couples.
- Doubles the standard deduction. The standard deduction will now be $12,000 ($24,000 for couples.) That means many fewer households will have to itemize deductions. It also means lower taxes for lower-income taxpayers. But a separate change — eliminating the personal exemption of $4,050 per taxpayer, will limit the benefit of this, especially for those with lots of children.
- Ends the tax deduction for union dues. Corporations can deduct payments to lawyers to fight unions, but union members who itemize deductions can no longer deduct their union dues under the new law.
Labor leaders react to the tax package
“Instead of giving a gigantic tax cut to the rich, Congress should focus on funding our domestic priorities.”
— AFL-CIO president Richard Trumka
“At a time when big business is already pocketing sky-high profits and the top one percent of earners are seeing their incomes significantly grow, it is confounding why Congress would focus on increasing their wealth at the expense of the country’s workers.”
— Teamsters general president James Hoffa, Jr.