Tax bills are complicated documents. That’s why we’re diving deeper into understandings its far-reaching impact as we inch closer to achieving financial fluency.
So what happened?
After 6+ weeks of negotiations, the Republicans passed the first major tax overhaul in nearly 30 years, December 20th. This marks the first legislative victory of the Trump presidency. And the GOP made good on their promise. They provided tax cuts to the majority of Americans before the end of 2017.
And So Why Does That Matter…?
The final bill contains several massive changes to our current system. Most importantly, the corporate rate has been cut from 35% to 21%. This change, as written in the bill, will be in effect forever or until another overhaul.
In addition, most Americans will receive tax cuts; but several tiers will decided them. Analysts presume that around 60% of Americans will receive some sort of cut in the next year. But many of those same analysts estimate that these cuts will only last for several years rather than forever.
In the long-term, most believe that the wealthiest Americans will be the true beneficiaries of the tax bill.
Lastly, many minor changes that do not receive as much attention as the previous changes will also carry significant impacts. State and local income tax deductions will be capped at $10,000, while personal exemptions have been eliminated. Also, a major addition to the bill was simultaneously repealing the Affordable Care Act’s individual mandate. This mandate requires that individuals purchase insurance or pay a fee.
Overall Tax Impact
Businesses will benefit the most from the tax reform due to the major corporate tax cut. While individual tax cuts end in 2025, the corporate tax cut is permanent. Therefore, many businesses will have more free cash to spend on stock repurchases, investment in core businesses, and special dividends. Stores such as Wal-Mart and Chrysler have already paid their employees higher wages & bonuses following passage of the bill.
Most analysts agree that the tax reform will in fact boost the economy in the short-term. But many also believe its long-term effect & magnitude is up for debate. Goldman Sachs estimates GDP will grow an additional 0.3% the next two years due to the tax reform.
They also believe, however, that additional gain will slow down, if not reverse, after 2020. Republicans argue that future congressional discussions will help turn the temporary tax cuts for individuals into long-term cuts. Regardless of conflicting perspectives, most analysts agree that it will boost markets as a whole in the next two years.
THE BOTTOM LINE
Analysts agree that most Americans will receive some sort of tax cut over the next two years. However, size of the cut will differ greatly across socioeconomic classes.
About 80% of middle class families (with incomes between $50,000-$75,000) will receive a cut of $100 or more in 2019. But by 2027, a meager 16% of Americans will receive a break of at least $100.
And analysts also agree that in the long-term, the bill will disproportionately favor the wealthiest socioeconomic classes. This is largely due to longer-term tax cuts for the 1%. Republicans argue that future congressional discussions will temper these worries.
That’s because current temporary cuts for the average American will “hopefully” become permanent. However, extending or expanding these cuts would likely involve nudging up the corporate tax rate. That’s something the president has expressed an unwillingness to compromise on.
In case you missed it… Check out our recent post about the G20 and if global leaders (and investors) are chasing an elusive dream
Download the Rapunzl App & Invest For Free or learn more at our website