ATR Analysis of the Senate’s Tax Cuts and Jobs Act

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Posted by Alexander Hendrie on Friday, November 10th, 2017, 10:43 AM PERMALINK

The U.S. Senate last night released their tax reform plan, the “Tax Cuts and Jobs Act.” Senate Finance Committee Chairman Orrin Hatch (R-Utah) and members of the Committee should be commended for releasing a tax plan that cuts taxes for individuals, simplifies the code, and allows American businesses to compete and thrive abroad and at home.

ATR President Grover Norquist released the following statement praising the plan:

“The release of the Senate outline for tax reform following the House Ways and Means legislation makes it clear that existing differences can be negotiated within a matter of weeks to enact a pro-growth tax reform package that reduces taxes for Americans at all income levels and fulfills the promises of the tax reform framework put forward by the GOP leadership this summer.”

Both the House and Senate bills reduce taxes for Americans of all income levels, reduce taxes on businesses, and implement reforms to the code that will grow the economy, leading to higher wages and new or better jobs.

In following a lengthy regular order process that has included dozens of hearings, the Senate Finance Committee will begin marking up this legislation next week. The Finance Committee should quickly approve this bill and send it to the full Senate for approval.

Individual provisions

-While the house bill contains four brackets, the Senate bill maintains the existing seven brackets. However, the Senate bill lowers (almost) every bracket and is a significant net tax cut.

                -Current law: 10, 15, 25, 28, 33, 35, 39.6

                -Senate bill: 10, 12.5, 22.5, 25, 32.5, 35, 38.5

                -House bill: 12, 25, 35, 39.6

The Senate bill would see strong tax reduction for American families across the country. A family of four earning $73,000 would see a tax cut of nearly $1,500 – a tax reduction of 40 percent.

-Both bills double the standard deduction ($6,000 to $12,000 for an individual. $12,000 for a family and $24,000 for a family).

-The Senate bill fully repeals the State and Local Tax deduction. The House bill leaves intact a $10,000 limit on deductibility of property taxes but otherwise repeals SALT.

-Both bills increase the child tax credit. The Senate bill increases the CTC to $1,650 per child, while the House bill increases the CTC to $1,600 per child with a $300 credit for parents and adult dependents.

- The House bill doubles the exemption for the Death Tax (to roughly $10M per individual) and repeals it fully after six years. The Senate bill also doubles the exemption but fails to repeal the Death Tax.

-Both bills repeal the Alternative Minimum Tax.

-The House bill creates a $500,000 cap on the home mortgage deduction. The Senate preserves the existing $1 million cap.

-Both bills preserve existing 401(k) and retirement tax preferences.

Business

-Both proposals propose a 20 percent rate, which would take the U.S. rate from the highest in the developed world to a rate that is competitive with the rest of the world. The Senate bill implements this rate in 2019, while the House bill implements a 20 percent rate effective 2018.

-According to an analysis by the Council of Economic Advisers, a 20 percent corporate rate would increase average household income by between $4,000 and $9,000.

-Both proposals implement 100 percent expensing for five years.

-Both proposals also expand Sec. 179 small business expensing. The House bill increases Sec. 179 from $500,000 to $5 million, with the phaseout increasing from $2 million to $10 million for five years. The Senate bill permanently increases Sec. 179 to $1 million with a phaseout of $2.5 million.

-Both proposals preserve Sec. 1031 like-kind exchanges for real property.

-Both proposals limit the deductibility of net interest. The House bill utilizes a 30 percent cap when net interest exceeds earnings before interest, tax, depreciation and amortization (EBITDA). The Senate bill also limits deductibility of interest to 30 percent of modified taxable income.     

-Both proposals reduce the tax rate on pass-through entities (sole-properties, partnerships, LLCs, S-corps)

-The Senate bill provides a 17.4% deduction for domestic non-service pass-through income.

-The House bill applies a 25% rate to 30 percent of non-service pass-through income, while 70 percent is taxed as individual income.

-Both bills repeal or limit multiple credits and deductions:

-Sec. 199 domestic manufacturing deduction is repealed.

-The net operating loss deduction is limited.

-Deductions for entertainment and transportation expenses are limited.

-The tax credit for the production of drugs for rare diseases is repealed in the House bill but not the Senate bill

International

-Implements a modern, territorial system of taxation through the creation of a 100 percent dividend exemption system.

-Both proposals implement base erosion rules designed to ensure that income is not improperly assigned to low tax jurisdictions.

-Both the House and Senate plans implement a repatriation rate. The House has a 14 percent for cash, and 7 percent for non-cash, while the Senate has a 10 percent rate for cash and a 5 percent rate for non-cash. This allows an estimated $2.6 trillion in after-tax income to come back to the U.S. to be reinvested in the economy. Ideally, the repatriation rate should be single digit rates. However, this reform will still allow trillions to come back into the U.S. economy. 

Photo Credit: Gage Skidmore

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