This week, Congress passed a massive new tax bill into law, and it's now on President Donald Trump's desk. The bill is expect to take effect immediately, which could mean some big changes in 2018.
Over the last year, we've covered the changing rhetoric surround tax reform, and now that the final bill is ready, it's time to look at what was promised, what's changed and what the law will mean for your business and your consumer's wallets.
Here's what you can expect.
What was promised
Both Trump and Speaker of the House Paul Ryan (R-Wis) wanted to lower the corporate tax rate and cut taxes. Trump's plan especially gave large corporate cuts, lowering the corporate tax rate to 15 percent. In October, some thought the bill would lower the corporate tax rate gradually, but the White House was against this plan.
Republican lawmakers said with this cut, large corporations would be able to raise wages and reinvest in their workforce. This in turn would increase consumer spending and offset the $1.5 trillion added to the national deficit, which is what the Congressional Budget Office estimated the bill would add over the next 10 years.
Last May, Eric Toder, Institute Fellow and Co-Director at the Tax Policy Center, told us that neither blueprint was better or worse for businesses, but the tax cuts wouldn't stick around unless the plan was deficit-neutral.
Ryan's plan was especially contentious for the lighting and home furnishings industry because of the inclusion of the so-called boarder-adjustment tax (BAT). As we reported, the BAT is a “destination-based cash flow tax,” which means that a tax is levied at the place of consumption (territorial). Simply put, importers pay an added tax of 20 percent; exports are tax-free.
Manufacturers warned the BAT would force them to raise their prices to offset the BAT, which would then be passed down to the retailer and probably the consumer.
As far as small businesses went, Brian Thompson, business lawyer and CPA, said owners should ignore the corporate tax cut since it wouldn't affect them and instead look at tax brackets and individual and S-corporation cuts. Restructuring the current tax brackets would help business owners pay less interest.
And finally, Republicans wanted to simplify the tax code to make it easier to file.
What happened
Thankfully, the BAT was completely dropped from the final bill. Representatives from the American Lighting Assn. and the Home Furnishings Assn. made multiple trips to Washington, D.C. to speak with congressmen about the tax and the damage it would do to the industry, and their efforts helped convince lawmakers to abandon the tax.
The final bill brought the corporate tax rate down to 21 percent, effective immediately, and that $1.5 trillion is still expected to be added to the national deficit. Each tax bracket will see tax cuts with high-earners getting the largest cuts, but because the bill is not deficit-neutral, they will expire after 10 years if Congress takes no further action, causing taxes to go up possibly higher than they are now.
Though there was talk of being able to file on a post card, that will not be possible. If anything, this new bill made filing taxes a bit more complicated, not less.
What it all means
As Toder told Vox, taxpayers shouldn't expect to wake up on Jan. 1 and see a huge change, but the bill did have some good news for small business owners.
Thompson sites two immediate benefits for S corporations. First, there will be a new 20-percent deduction from new income for pass-through business owners who use their individual tax returns to pay business income taxes. Second, the bill lowers the marginal income tax rate on the individual return.
"If the owner is in the top bracket (reduced from 39.6 percent to 37 percent by the tax bill)," Toder adds, "he or she will now pay a top rate on the S corp profits of only 29.6 percent."
Additionally, most consumers can expect to see a larger tax return this year and an even larger one in 2019. This could definitely translate to more consumer spending, which Thompson expects to see, but as Toder points out, the highest earners are expected to get the biggest break while middle and low-income earners will see a smaller cut, which he says will dampen the effect.
"Because the economy is close to full employment," he explains, "higher consumer spending can only increase employment a little bit before it starts either raising the rate of inflation or causing the Fed to raise interest rates in order to prevent inflation."
In short, gains now may end up costing consumers and businesses in the long run.
There's also little evidence to suggest that the money saved by lowering the corporate tax rate will translate to higher wages and reinvestment in the labor force. Republican lawmakers argue that the wage increases will lead to more consumer spending and a healthier, growing economy overall, which will make up for the $1.5 trillion added to the deficit. Both Toder and Thompson disagree.
"The Tax Policy Center estimates it will offset less than 20 percent of the revenue loss," Toder says. "No credible source believes that the tax cut won’t increase the deficit."
Thompson doesn't believe corporations will hire or invest more in labor with the money saved, a view shared by Federal Reserve officials Neel Kashkari (Minneapolis Fed President) and Robert Kaplan (Dallas Fed President).
“Very few CEOs that I’ve talked to in my district say that the tax package is going to lead to some dramatic change in their behavior,” Kashkari told Bloomberg this week. “I do think it’s going to lead to more buybacks and more dividends. That’s not necessarily a bad thing, but I don’t think that that itself is going to lead to a dramatic increase in investment or hiring in the U.S.”
This new law takes effect immediately, which means you should probably start your taxes a little earlier this year. As with any change, there's bound to be some confusion and adjustment — all of which is manageable provided taxpayers don't wait until the last minute to file.
