November 9, 2017
Republicans pushing their tax proposal in the U.S. House have not shied away from one of its largest goals — cutting taxes for large corporations.
A key part of the proposal is a permanent cut to the corporate tax rate from 35 percent to 20 percent — a move estimated to reduce federal revenues by $1.5 trillion over the next decade alone. While early discussions involved lowering the top individual tax rate from 39.6 percent to 35 percent, the most recent House proposal keeps it at 39.6 percent.
That’s not to say there aren’t tax benefits for others across the board — reducing the number of tax brackets would mean lower tax rates for some, raising the standard deduction would help low-to-middle-income individuals, and there are bumps in child tax credits.
But the benefits favor the top earners, according to analysts.
The nonpartisan Tax Policy Center estimates the wealthiest 1 percent would reap 48 percent of the benefits from this tax reform legislation.
To make up some of that estimated $1.5 trillion loss in revenue, the tax bill proposes numerous changes in personal deductions and exemptions on things like medical expenses, charitable giving, adoption tax credits, student loans, and state and local tax deductions. The Tax Police Center’s report stated that individual income tax revenue would actually increase by $470 billion, largely as a result of those changes in personal deductions and exemptions.
Robert Ricketts, director of the School of Accounting at Texas Tech, said reducing these deductions and exemptions is a clear example of how this bill impacts the lower and middle class in exchange for corporate tax cuts. He said this bill does not simplify the tax code — an argument being made as a reason to pass it — and there are winners and losers all over the spectrum. But mostly it’s a tax break for the highest earners, he said.
So why is it being hailed as a win for middle-class families?
The heart of the tax plan is “trickle-down” economics.
Advocates for the bill say the cuts to business taxes, eventually, will be passed down to employees and others through economic investment.
“You have to look at this tax reform in its entirety,” said U.S. Rep. Jodey Arrington, R-Lubbock. “What’s most difficult to translate for the American people is that what we want is not just for them to keep more of their current paycheck, we want them to have the opportunity for a better job with a bigger paycheck. That 20 percent corporate tax rate — that is going to allow these companies to be competitive, keep their businesses here instead of going overseas, create more jobs and, ultimately, that’s what we haven’t seen in this country for a decade.”
Arrington said middle- and working-class people need higher-paying jobs. Those that provide these jobs, he continued, are going to have more ability to offer them under this tax plan. Arrington argued that when the federal government relieves the tax burden on companies for business investment, that creates a big return in higher-paying jobs.
Others argue that’s not the case.
Ricketts referred to research from the U.S. Bureau of Labor Statistics that showed the median weekly wage earnings for workers dropped from $330 in 1986 when the last significant corporate tax reform went into effect, to $325 just two years after. Median wages continued dropping, eventually going below $312 just before 1991.
Ricketts said he’s not aware of any data that shows workers benefit from corporate tax cuts.
“What does go up? When (large corporations) make more money, their share price goes up, not their labor cost,” Ricketts said. “If they plowed the extra money into labor, the investors wouldn’t be better off … just the observable facts we have pretty clearly say that cutting the corporate tax burden doesn’t fall into the workers’ pockets. It just doesn’t.”
This is an argument against the bill being pushed by Democrats, including Miguel Levario, who’s running against Arrington in 2018.
“These supposed savings that we’re supposed to see are a drop in the bucket, and it also makes me concerned because they’re still harping on the fact that that economic boom they’re expecting will make up that revenue,” Levario said. “But what we’ve seen is that these ’81 and ’86 tax cuts that Republicans keep referencing disproportionately affected the middle and working classes. … And when they have to raise taxes (to offset the corporate cuts), they certainly don’t come from the top 1 percent, they come from the middle and working class.”
He said what is provable is that after these tax cuts in the 1980’s, the wage gap became more extreme.
Levario said if Congress truly wants to help the working class, it should increase the minimum wage.
Asked which individuals would see a benefit from this tax proposal, Ricketts said it depends on the situation. In cutting the number of tax brackets, he said, some will drop down and pay a lower percentage while others get pulled into higher percentages.
Add that to the changes in deductions and exemptions. He said child tax credits increasing from $1,000 to $1,600 will help families with children, and the new credit of $300 for non-child dependents will help caretakers. Situations where someone could end up paying more are if a person has lots of medical expenses, high home mortgage interest, lots of state and local income tax, or high student loans.
Arrington said this bill is still being worked out, adding he has true concerns in phasing out some deductions, like those for medical expenses or an adoption credit repeal.
Arrington said he hopes these issues get resolved because the tax reform bill is the way to revive economic freedom and strengthen American businesses’ competitiveness with the rest of the world.
“I think this is absolutely, squarely, a middle-class and working American tax cut and tax reform package,” Arrington said. “This tax plan is going to grow the economy and it’s going to create more jobs… I’m convinced because job creators themselves are saying if you do this, you’re going to see this economy take off. You’re going to see opportunities we haven’t seen in over a decade.”
The Senate released its version of a tax reform bill on Thursday, and it does not include a repeal of the adoption tax credit. According to The Associated Press, the Senate Republicans’ version of the bill also offers a one-year delay on the corporate tax cut
Eddie McBride, president and CEO of the Lubbock Chamber of Commerce, said the organization has been a huge proponent of tax cuts to small businesses that he believes, in turn, will help grow the economy. McBride said area representatives have been responsive, but he said the chamber still has some concerns with the tax reform package on the table.
“I don’t know if this particular bill is as business-friendly in its current stage as we hoped it would be,” McBride said. “If you weighed all the cuts versus all the deductions being made for some small businesses, there’s some cuts that could hurt more than the benefits. We know the devil is going to be in the detail by the time the bill is finally finished.”
McBride said he’s concerned with the 25 percent tax rate assigned to “pass through” businesses — the smallest businesses whose profits “pass through” to become regular income for owners. That’s a higher rate than the majority have paid in the past. Some of these businesses could also face a “70/30” rule dictating that only 30 percent of the income is subject to the “pass through” rate, the rest taxed at individual rates based on the brackets.
Arrington said details are still being worked out in the bill — especially now with the release of the Senate’s version.
But Ricketts added he doesn’t expect much discussion, debate, or even negotiations on this bill because it’s being led by one party without any input from the other.