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Changes to the Individual Income Tax

Changes to the Individual Income Tax

  • Lowers most individual income tax rates, including the top marginal rate from 39.6 percent to 37 percent. Retains the current seven-bracket structure, but bracket widths are modified. (Table 1 and Table 2)

Single Filer

Current Law

Tax Cuts and Jobs Act

10%

$0-$9,525

10%

$0-$9,525

15%

$9,525-$38,700

12%

$9,525-$38,700

25%

$38,700-$93,700

22%

$38,700-$82,500

28%

$93,700-$195,450

24%

$82,500-$157,500

33%

$195,450-$424,950

32%

$157,500-$200,000

35%

$424,950-$426,700

35%

$200,000-$500,000

39.6%

$426,700+

37%

$500,000+

 

Table 1. Tax Brackets for Ordinary Income Under Current Law and the Tax Cuts and Jobs Act (2018 Tax Year)

Married Filing Jointly

Current Law

Tax Cuts and Jobs Act

Note: The Head of Household filing status is retained, with a separate bracket schedule.

10%

$0-$19,050

10%

$0-$19,050

15%

$19,050-$77,400

12%

$19,050-$77,400

25%

$77,400-$156,150

22%

$77,400-$165,000

28%

$156,150-$237,950

24%

$165,000-$315,000

33%

$237,950-$424,950

32%

$315,000-$400,000

35%

$424,950-$480,050

35%

$400,000-$600,000

39.60%

$480,050+

37%

$600,000+

Table 2. Tax Brackets for Ordinary Income Under Current Law and the Tax Cuts and Jobs Act (2018 Tax Year)

 

  • Indexes tax brackets and other provisions by the chained CPI measure of inflation.

  • Increases the standard deduction to $12,000 for single filers, $18,000 for heads of household, and $24,000 for joint filers in 2018 (compared to $6,500, $9,550, and $13,000 respectively under current law).

  • Eliminates the personal exemption.

  • Retains the charitable contribution deduction, and limits the mortgage interest deduction to the first $750,000 in principal value. Limits the state and local tax deduction to a combined $10,000 for income, sales, and property taxes. Taxes paid or accrued in carrying on a trade or business are not limited.

  • Limits or eliminates a number of other deductions.

  • Expands the child tax credit from $1,000 to $2,000, while increasing the phaseout from $110,000 in current law to $400,000 married couples. The first $1,400 would be refundable.

  • Effectively repeals the individual mandate penalty, by lowering the penalty amount to $0, effective January 1, 2019.

  • Raises the exemption on the alternative minimum tax from $86,200 to $109,400 for married filers, and increases the phaseout threshold to $1 million.

  • The majority of individual income tax changes would be temporary, expiring on December 31, 2025. Several, such as the adoption of chained CPI and functional repeal of the individual mandate, would be permanent.

Changes to Business Taxes

 

  • Lowers the corporate income tax rate permanently to 21 percent, starting in 2018.

  • Establishes a 20 percent deduction of qualified business income from certain pass-through businesses. Specific service industries, such as health, law, and professional services, are excluded. However, joint filers with income below $315,000 and other filers with income below $157,500 can claim the deduction fully on income from service industries. This provision would expire December 31, 2025.

  • Allows full and immediate expensing of short-lived capital investments for five years. Increases the section 179 expensing cap from $500,000 to $1 million.

  • Limits the deductibility of net interest expense to 30 percent of earnings before interest, taxes, depreciation, and amortization (EBITDA) for four years, and 30 percent of earnings before interest and taxes (EBIT) thereafter.

  • Eliminates net operating loss carrybacks and limits carryforwards to 80 percent of taxable income.

  • Eliminates the domestic production activities deduction (section 199) and modifies other provisions, such as the orphan drug credit and the rehabilitation credit.

  • Enacts deemed repatriation of currently deferred foreign profits, at a rate of 15.5 percent for cash and cash-equivalent profits and 8 percent for reinvested foreign earnings.

  • Moves to a territorial system with base erosion rules.

  • Eliminates the corporate alternative minimum tax.

 

Other Changes

  • Doubles the estate tax exemption from $5.6 million to $11.2 million, which expires on December 31, 2025. The exemption will increase with inflation.

Impact on the Economy

According to the Tax Foundation’s Taxes and Growth Model, the Tax Cuts and Jobs Act would increase the long-run size of the U.S. economy by 1.7 percent (Table 3). The larger economy would result in 1.5 percent higher wages and a 4.8 percent larger capital stock. The plan would also result in 339,000 additional full-time equivalent jobs.

The larger economy and higher wages are due chiefly to the significantly lower cost of capital under the proposal, which reduces the corporate income tax rate and accelerates expensing of capital investment for short-lived assets.

Source: Tax Foundation Taxes and Growth Model, November 2017.

Change in long-run GDP

1.7%

Change in long-run capital stock

4.8%

Change in long-run wage rate

1.5%

Change in long-run full-time equivalent jobs

339,000

Table 3. Economic Impact of the Tax Cuts and Jobs Act

The long-run economic changes are generated by the corporate income tax rate cut. Table 4 below isolates the economic impact of this key provision that increases long-run economic growth.

Provision

Long-run GDP Growth

Lower the corporate income tax rate to 21 percent.

2.6%

Table 4. Key Provision Increasing Economic Growth, 2018-2027

The growth of GDP under this plan, however, is not linear. In 2018, the first year of this tax plan, growth is projected to jump 0.44 percent above the current baseline projection as firms take advantage of the full and immediate expensing of equipment and the lower corporate income tax rate. These provisions encourage capital investment.

The initial spike in growth is reduced later during the decade, however, when growth falls slightly below the baseline. This is due to the temporary nature of many of these provisions. Economic growth is borrowed from the future, but the plan, in aggregate, still increases economic growth over the long run. The figure below illustrates this phenomenon.

Changes to the Individual Income Tax

 

  • Lowers most individual income tax rates, including the top marginal rate from 39.6 percent to 37 percent. Retains the current seven-bracket structure, but bracket widths are modified. (Table 1 and Table 2)

 

Single Filer

Current Law

Tax Cuts and Jobs Act

10%

$0-$9,525

10%

$0-$9,525

15%

$9,525-$38,700

12%

$9,525-$38,700

25%

$38,700-$93,700

22%

$38,700-$82,500

28%

$93,700-$195,450

24%

$82,500-$157,500

33%

$195,450-$424,950

32%

$157,500-$200,000

35%

$424,950-$426,700

35%

$200,000-$500,000

39.6%

$426,700+

37%

$500,000+

 

Table 1. Tax Brackets for Ordinary Income Under Current Law and the Tax Cuts and Jobs Act (2018 Tax Year)

Married Filing Jointly

Current Law

Tax Cuts and Jobs Act

Note: The Head of Household filing status is retained, with a separate bracket schedule.

10%

$0-$19,050

10%

$0-$19,050

15%

$19,050-$77,400

12%

$19,050-$77,400

25%

$77,400-$156,150

22%

$77,400-$165,000

28%

$156,150-$237,950

24%

$165,000-$315,000

33%

$237,950-$424,950

32%

$315,000-$400,000

35%

$424,950-$480,050

35%

$400,000-$600,000

39.60%

$480,050+

37%

$600,000+

Table 2. Tax Brackets for Ordinary Income Under Current Law and the Tax Cuts and Jobs Act (2018 Tax Year)

 

  • Indexes tax brackets and other provisions by the chained CPI measure of inflation.

  • Increases the standard deduction to $12,000 for single filers, $18,000 for heads of household, and $24,000 for joint filers in 2018 (compared to $6,500, $9,550, and $13,000 respectively under current law).

  • Eliminates the personal exemption.

  • Retains the charitable contribution deduction, and limits the mortgage interest deduction to the first $750,000 in principal value. Limits the state and local tax deduction to a combined $10,000 for income, sales, and property taxes. Taxes paid or accrued in carrying on a trade or business are not limited.

  • Limits or eliminates a number of other deductions.

  • Expands the child tax credit from $1,000 to $2,000, while increasing the phaseout from $110,000 in current law to $400,000 married couples. The first $1,400 would be refundable.

  • Effectively repeals the individual mandate penalty, by lowering the penalty amount to $0, effective January 1, 2019.

  • Raises the exemption on the alternative minimum tax from $86,200 to $109,400 for married filers, and increases the phaseout threshold to $1 million.

  • The majority of individual income tax changes would be temporary, expiring on December 31, 2025. Several, such as the adoption of chained CPI and functional repeal of the individual mandate, would be permanent.

 

Changes to Business Taxes

  • Lowers the corporate income tax rate permanently to 21 percent, starting in 2018.

  • Establishes a 20 percent deduction of qualified business income from certain pass-through businesses. Specific service industries, such as health, law, and professional services, are excluded. However, joint filers with income below $315,000 and other filers with income below $157,500 can claim the deduction fully on income from service industries. This provision would expire December 31, 2025.

  • Allows full and immediate expensing of short-lived capital investments for five years. Increases the section 179 expensing cap from $500,000 to $1 million.

  • Limits the deductibility of net interest expense to 30 percent of earnings before interest, taxes, depreciation, and amortization (EBITDA) for four years, and 30 percent of earnings before interest and taxes (EBIT) thereafter.

  • Eliminates net operating loss carrybacks and limits carryforwards to 80 percent of taxable income.

  • Eliminates the domestic production activities deduction (section 199) and modifies other provisions, such as the orphan drug credit and the rehabilitation credit.

  • Enacts deemed repatriation of currently deferred foreign profits, at a rate of 15.5 percent for cash and cash-equivalent profits and 8 percent for reinvested foreign earnings.

  • Moves to a territorial system with base erosion rules.

  • Eliminates the corporate alternative minimum tax.

 

Other Changes

  • Doubles the estate tax exemption from $5.6 million to $11.2 million, which expires on December 31, 2025. The exemption will increase with inflation.

 

Impact on the Economy

According to the Tax Foundation’s Taxes and Growth Model, the Tax Cuts and Jobs Act would increase the long-run size of the U.S. economy by 1.7 percent (Table 3). The larger economy would result in 1.5 percent higher wages and a 4.8 percent larger capital stock. The plan would also result in 339,000 additional full-time equivalent jobs.

The larger economy and higher wages are due chiefly to the significantly lower cost of capital under the proposal, which reduces the corporate income tax rate and accelerates expensing of capital investment for short-lived assets.

Source: Tax Foundation Taxes and Growth Model, November 2017.

Change in long-run GDP

1.7%

Change in long-run capital stock

4.8%

Change in long-run wage rate

1.5%

Change in long-run full-time equivalent jobs

339,000

Table 3. Economic Impact of the Tax Cuts and Jobs Act

The long-run economic changes are generated by the corporate income tax rate cut. Table 4 below isolates the economic impact of this key provision that increases long-run economic growth.

Provision

Long-run GDP Growth

Lower the corporate income tax rate to 21 percent.

2.6%

Table 4. Key Provision Increasing Economic Growth, 2018-2027

The growth of GDP under this plan, however, is not linear. In 2018, the first year of this tax plan, growth is projected to jump 0.44 percent above the current baseline projection as firms take advantage of the full and immediate expensing of equipment and the lower corporate income tax rate. These provisions encourage capital investment.

The initial spike in growth is reduced later during the decade, however, when growth falls slightly below the baseline. This is due to the temporary nature of many of these provisions. Economic growth is borrowed from the future, but the plan, in aggregate, still increases economic growth over the long run. The figure below illustrates this phenomenon.

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