Tax Cuts and Jobs Act of 2017

Introduction

The Trump administration signed into law the 2017 tax cuts and jobs act (TCJA), a significant change to the country's tax system since the late 20th century. The law's primary objectives were to effect specific tax deductions in both the business and individual tax rates. However, there had been mounting opposition to the bill before its inception into law from some lawmakers, economic experts, and the public citing that the bill favors the wealthy (Kalcheva et al., 2020). At the same time, corporations with international business operations would also be hindered by the tax law despite the law promising a resurgence in economic growth (Kalcheva et al., 2020). Reducing the tax burden on individual people meant higher wages for workers, increased job opportunities, and a satisfied middle class who were once oppressed by previous tax reforms. This paper examines the tax cuts and jobs act policy, its impact, weaknesses, and recommendations for better tax equality.

Summary of the Law, Intersecting Identities, Stated Goals, and Impact

As earlier noted, the TCJA was geared towards reforming both the corporate and individual income tax returns, changing the existing model of taxation in the U.S to a territorial taxation-based model. The tax cuts were meant to lower tax rates and the capital cost, prompting economic growth of over 1.7% of the total GDP, over 300,000 new jobs, and increased wages of approximately 1.5% (Tax Foundation, 2020). While the individual tax rates retained the current seven-bracket tax structure, the tax was lowered from 39.6% to 37%, standard deductions were significantly increased for individuals and couples, and the elimination of certain exemptions. Other additions to the individual income tax entail temporary changes in individual income tax until 2026 and expansion of the child tax credit.

Following the tax law, corporate tax was lowered down to 21% from 2018 onwards. Further, business income from certain pass-through businesses will receive a 20% deduction, except for health and law companies. International tax rules were also redesigned, allowing companies to receive huge chunks in net benefits over the tax reforms' duration. After ten years of the reforms, the new individual tax income would slowly fade and become net tax while the corporate tax reductions were permanent.

These tax cuts aimed to lower tax rates for low and middle-income earners while boosting competitiveness among U.S business companies. With the increased standard deduction, families' tax filing burden would be reduced due to less income itemization. Tax credits for children and low-income earners reduced medical deductions, and the creation of Opportunity Zones are all goals that spur individual and economic growth (Treasury.gov, n.d.). However, as Kalcheva et al. (2020) note, the wealthy and stakeholders in large corporations were the tax reforms' largest beneficiaries. While the bill was intended to strengthen neutrality in taxation, several financial models showcased economic inequalities between the rich and the poor. These inequalities have existed since the previous decades, and the recent tax reforms continue to widen the rich vs. poor gap.

Over the next ten years, the tax cuts were meant to stimulate the economy through increasing deficits, GDP, and employment opportunities. According to Kalcheva et al. (2020), the foreseen changes in net federal revenue aim to reduce the deficits from a reduction in spending for low-income earners while increasing deficits for the high-income earners due to a reduction in taxes. According to Berman et al. (2016), the impact creates financial uncertainties and inequalities, with the tax cuts favoring a group of people who directly benefit from the economy. More specifically, the tax reforms' changes help the rich accumulate more wealth, worsening the already weakness in the U.S tax code.

By the end of the 2018 fiscal year, there were mixed results from introducing the tax cuts on the country's economy. For instance, the budget deficit increased by almost 17% from the previous year, a .9% GDP increase right from a 3.5% GDP recorded the previous year (Gale et al., 2019). Indeed, the economy grew slightly due to the ongoing tax reforms, and more growth is expected over the next ten years. Gale et al. (2019) also reported that the nation's revenues fell by a small margin but spending increased, a goal that was not achieved by the new tax reforms. Much of the shortcomings of the tax cuts within the first year of its implementation can be attributed to the new reforms' rapid adjustments. However, Gale et al. (2019) and Kalcheva et al. (2020) acknowledge that the tax policy needs more time for substantial results to be recognized. Ten-year forecasts will paint a clear picture of the process the tax act has made on the U.S tax issues, revenue, GDP, and the economy at large.

Indeed, the tax cuts have their positives and negatives on different groups of people. According to Kalcheva et al. (2020), the tax reforms favored the wealthy, who virtually paid little or no taxes despite amassing much assets and wealth. Middle and low-income workers are forced to pay taxes, despite their taxes lowered, creating unfairness and wealth distribution inequality. Undoubtedly, the wage disparity in the U.S is huge, yet wages of middle and low-income earners have stagnated over the past decades despite a growing economy. Berman et al. (2016) note that much of the country's income sources, including capital gains, self-employment, and business income, go to the top 1% of income earners, denoting that the rest of the income earners do not earn enough. Apart from income disparities, the tax reforms exposed disparities in wealth distribution, with the top 1% income earners owning much of the financial assets that have significantly increased in value.

A major concern is that the U.S tax system will more likely keep on expanding the wealth disparity gap in the coming years due to how it treats capital assets, much of which is owned by the top 1% income earners. Whereas capital income follows the normal taxation metrics, capital assets often receive favorable tax rates compared to wages. Ultimately, the tax cuts lean on wealthy people who own most of the country's high-value capital assets (Berman et al., 2016). With middle and low-income earners, much of their income comes from the salaries they receive, and as such, undergo the ordinary taxation as stipulated in the TCJA. Previous legislation on the same has also supported the wealthy in amassing more wealth and assets. TCJA has further weakened the taxation of capital assets, allowing the wealthy to stockpile much of their assets due to the low tax rates imposed on these assets (Kalcheva et al., 2020). In essence, the TCJA has significantly helped the wealthy get richer and increase the country's wealth gap. Arguably, if the tax structure were equitable, not many would have amassed the wealth they own today through capital assets.

According to Sammartino et al. (2018), individual income earners have small gains from the TCJA due to minor deductions, lower tax rates, and tax credits, especially for families with children. Lower tax rates on pass-through businesses, such as S corporation, sole proprietorship, and LLCs, are not subject to the corporate tax rates. As such, individuals owning such businesses receive their full income before being taxed under the individual tax rate. Previous legislation on federal tax laws favored businesses operating as pass-through. With the growth of the economy and more businesses, income from pass-through businesses has surpassed that of the corporations. The effective tax income from these pass-through businesses is lower than those from corporations distributed to the shareholders as dividends and capital gains. In retrospect, lowering the individual tax rates still favored the rich as most own the high-valued pass-through businesses.

Policy Review

The previous section has highlighted the impact and beneficiaries of the TCJA in detail. With the wealthy and shareholders in pass-through businesses significantly benefitting from the new tax reforms, the law showcases its weaknesses in reducing the wealth disparity currently existing in the country. Before the TCJA was passed, pass-through businesses were already taxed at a lower effective tax rate than corporates. With TCJA, a loophole has been created. The law establishes that certain pass-through businesses will receive a 20% reduction in income tax. According to Gale et al. (2019), while the relief is meant to uplift small businesses, the real beneficiaries are large pass-through businesses, and more so, the wealthy. With more than 60% of high-income earners claiming the deduction benefits (Gale et al., 2019), TCJA provisions and corporate tax cuts tilt towards large businesses instead of benefiting the small business owners.

Another weakness of the law comes from the estate tax, which, since long ago, has been a tax imposed when wealth is transferred from one entity to another at death. The tax plays a significant role in preventing large concentrations of wealth by an individual or family. With the tax system's reshuffling, wealthy individuals have managed to find loopholes and bypass the estate tax in the long run. TCJA stipulates that estate taxes only apply to singles and couples owning over $11.4 and $22.8 million worthy of estate property, respectively (Thornton & Hendricks, 2019). With the Tax Policy Center predicting that about 2.7 million Americans will die by 2018, only 0.07% are estimated to pay their estate taxes (Thornton & Hendricks, 2019). Moreover, according to the new provisions, only the estate value exceeding the set margins would fall under the estate tax.

A significant weakness of the TCJA policy is no tax on unrealized gains or deferrals. While the wealthy own several high-value capital assets, the advantage they carry is that these assets are exempted from taxation unless sold to another party. As the assets increase in value, the untaxed value they carry is called unrealized gain (Thornton & Hendricks, 2019). A deferral is the owner's capacity to avoid paying taxes until the asset ownership is transferred or sold to someone else. Undoubtedly, the wealthy can hold on to assets indefinitely and without paying taxes for these properties. Simultaneously, these assets continue to gain value. By the time the owners decide to sell their assets, the unrealized gains can be massive yet untaxed. Therefore, the owners could decide to sell some of their assets at a loss to realize the gains other assets bring.

Indeed, capital assets can generate substantial gains over time. For instance, a corporate stock, an example of a capital asset, increases in value when the stock market performs well. With recent trends in stock markets, its value can increase tremendously. Thornton & Hendricks (2019) note that with no concrete approximations yet on taxation loss due to unrealized gains and deferrals, the above example is a clear indication of the accruing wealth on top of the initial capital asset. The stepped-up basis further brings more complications to the tax reforms, creating a vulnerability for wealthy individuals to exploit. According to Thornton & Hendricks (2019), no capital asset is taxed when transferred to another person or charity through donations or bequests. While some estate tax may apply in such a situation, the individual is exempted from paying any accrued taxes on the asset during their lifetime. The stepped-up basis provision in the TCJA prohibits the inheritor from paying any tax gains on the property unless those accrued after the inheritance.

All the above weaknesses in the policy are compounded by an already weakened policymaking process exploited through corruption and power. Thornton & Hendricks (2019) point out that the tax cuts were rushed despite numerous cries from economists on the new system's ineffectiveness to resolve the wealth inequality experienced in the country. In a show of unprecedented partisanship, Congress and the Trump administration passed a tax law that did not conform to the citizens' views. No public participation was fostered before passing the bill, Congress was under ‘powerful forces’ to include provisions that favored the wealth, and the entire bill raised more concerns than solutions (Thornton & Hendricks, 2019). Passing and signing the bill into law is the first mistake that led to avoidable weaknesses and exploitations in the final policy.

Unfortunately, the TCJA that emerged after signing the policy will continue to enrich the top 1% income earners and highly-valued business owners in the country. With more than two fiscal years gone since its inception, the policy continues to fatten the already rich class who wish to support tax cuts for long-term gains. Those who invested heavily in this corrupt entry to richness are unwilling to consider the middle and low-income earners' demise and the billions of dollars of lost revenue. With the reduction of individual and corporate tax rates, a 20% reduction in pass-through businesses, and a weakened estate tax, among other provisions, major reforms need to be undertaken to safeguard the interests of middle and low-income earners while bridging the wealth gap.

Loopholes within the TCJA are a testament to the long-predated case of the rich versus the poor. Therefore, eliminating or reducing the tax advantages that favor the wealthy is a positive direction towards reducing wealth inequality. Thornton & Hendricks (2019) acknowledge that taxing the total net worth on top of the existing tax rates will compound the rich to pay taxes according to their total assets and income. Taxing extreme wealth is one approach a wealth tax can help reduce wealthy individuals' rapid accruement. Remarkably, a wealth tax would address income and wealth inequalities, enforcing the notion that a person's ability to pay taxes depends on their net worth (Kalcheva et al., 2020). The wealthy tax will entail each high-valued individual assessing their assets and determining their net worth after deducting any debts owed. The net value is then subjected to a tax rate set by a provision in the policy.

Conclusion

The Tax Cuts and Jobs Act of 2017 continue to elicit a debate on its impact on the economy and citizens. While proponents of the policy say that it will help the middle and low-income workers ease up on the tax burden, opponents argue that the bill favors the wealthy. In December 2017, President Trump signed provisions within the policy advocate to reduce tax rates for both the individuals and corporates. These reductions aimed to boost the economy, increase the employment rate., and increase the GDP. While there is no substantial impact analysis currently available on the policy, weaknesses have emerged that hinder the policy from achieving its intended goals. Indeed, individual and corporate tax reductions, no tax on unrealized gains, limitations on the estate tax, among other provisions, lean towards enriching the top 1% earners in the country. These provisions allow these individuals to pay less tax or evade taxes altogether while they continue to amass much wealth. A better recommendation is implementing a wealthy tax provision on top of the existing tax rates to reduce the wealth inequality gap.

References

Berman, Y., Ben-Jacob, E., & Shapira, Y. (2016). The dynamics of wealth inequality and the effect of income distribution.  PloS one ,  11 (4), e0154196. doi:  10.1371/journal.pone.0154196

Gale, W. G., Gelfond, H., Krupkin, A., Mazur, M. J., & Toder, E. J. (2019). Effects of the Tax Cuts and Jobs Act: A preliminary analysis.  National Tax Journal ,  71 (4), 589-612. https://www.brookings.edu/wp-content/uploads/2018/06/ES_20180608_tcja_summary_paper_final.pdf

Kalcheva, I., Plecnik, J., Tran, H., & Turkiela, J. (2019). (Un)intended consequences? The impact of the 2017 Tax Cuts and Jobs Act on shareholder wealth.  SSRN Electronic Journal .  https://doi.org/10.2139/ssrn.3478889

Sammartino, F., Stallworth, P., & Weiner, D. (2018). The effect of the TCJA individual income tax provisions across income groups and across the states.  Washington, DC: Retrieved ,  5 (7), 2018. https://ntanet.org/wp-content/uploads/2018/02/the_effect_of_the_tcja_individual_income_tax_provisions_across_income_groups_and_across_the_states.pdf

Tax Foundation. (2020).  Full details and analysis: Tax Cuts and Jobs Act . Tax Foundation.  https://taxfoundation.org/final-tax-cuts-and-jobs-act-details-analysis/

Thornton, A., & Hendricks, G. (2019).  Ending special tax treatment for the very wealthy . Center for American Progress.  https://www.americanprogress.org/issues/economy/reports/2019/06/04/470621/ending-special-tax-treatment-wealthy/

Treasury.gov. (n.d.).  Fairness and opportunity for hardworking Americans . Front page | U.S. Department of the Treasury.  https://home.treasury.gov/policy-issues/top-priorities/tax-cuts-and-jobs-act/fairness-and-opportunity-for-hardworking-americans