GOP tax plan: 5 ways the proposed tax cuts could impact you

Last Updated Nov 3, 2017 9:19 AM EDT

Republicans are moving to remake the tax code, vowing to make it easier for individuals to pay Uncle Sam his due. 

The tax plan, which was released on Thursday, is touted as simple enough to allow nine of 10 Americans to "file on a form as simple as a postcard. But it's also aimed at lowering corporate taxes, as well as eliminating the estate tax and other taxes that impact wealthy families. 

Called the Tax Cuts and Jobs Act, the tax reform proposal is billed by Republican lawmakers as a path to job creation and higher wages for workers, even though there's little historical evidence that corporate tax cuts trickle down into higher pay for employees. Nevertheless, some low-wage and middle-class Americans are likely to benefit, thanks to a higher personal standard deduction and lower tax rates, although many may end up with fewer deductions, especially those in high-tax states. Middle-class gains may be scanty compared with those enjoyed by corporations and the wealthy, critics said. 

"There is no evidence to suggest this plan as a whole will be positive for middle-income workers and much to suggest that when this is complete, it will be a significant net negative," said Gene Sperling, a former director of the National Economic Council and Assistant to the President for Economic Policy in The White House, on a conference call to discuss the tax plan. "You can lower somebody's taxes, but people understand there is no free lunch."

The tax cuts are unlikely to be offset by equivalent spending reductions, which could cause the federal budget deficit and debt to grow, Moody's Investors Service senior vice president Sarah Carlson said by email. 

"It is unlikely that the increased taxable income from higher growth will compensate for the proposed cuts in tax rates," she added. 

Many of the provisions in the proposal will help President Donald Trump's businesses and boost his personal income, said Seth Hanlon, a senior fellow at the liberal-leaning Center for American Progress. Those include the phase out of the estate tax and lower rates for pass-through income.

"It's almost as if this bill was written by Donald Trump's accountant," Hanlon said. 

Like any major piece of legislation, the House GOP tax plan is likely to change as lawmakers wrangle over the details and as special interests weigh in. Passage of the bill is not assured, even with Republicans controlling both chambers of Congress and as Mr. Trump pushes legislators to deliver a measure by year's end. For now, the proposal amounts to the biggest change in U.S. tax law in decades. Here are five key takeaways:

Who benefits most? The tax plan is billed by the GOP as providing a break to the middle class, but critics say the benefits will overwhelmingly be enjoyed by corporations and the rich. That's because the tax rate on corporations will be reduced to 20 percent from 35 percent, allowing the country's biggest companies to retain more of their profits. 

Economists say there's little relationship between post-tax profit rates and business investment that boosts productivity, while productivity and wages have grown faster in periods of higher taxes, according to the left-leaning Economic Policy Institute

How would the richest Americans fare under the bill? The GOP plan keeps the highest individual income tax bracket for the country's top earners at 39.6 percent. But critics say the proposal still provides a windfall to rich families because it will double the limit on the estate tax to $10 million and then phase it out after six years. 

The proposal also calls for a 25 percent rate for pass-through businesses, such as sole proprietorships and partnerships, rather than paying the individual tax rate. For the rich -- who are more likely than the middle class to employ such tax structures -- that could produce a sizable savings. 

The proposal also does away with the alternative minimum tax, which will help reduce taxes on some higher-income taxpayers. 

Would any deductions be eliminated? Yes and no. The plan proposes limits on two popular deductions, which may hurt Americans in highly taxed or expensive states such as New York and California. The two biggest impacts will be on the mortgage interest deduction and the deduction for state and local taxes. Here are some of the more notable changes:

  • Homeowners will be capped at taking deductions on home mortgages greater than $500,000. 
  • Deductions for state and property taxes would be capped at $10,000. 
  • The medical expense deduction would be eliminated. 
  • Despite talk of capping the tax break for 401(k) plans, the proposal doesn't include changes to the retirement plans. 

How would my tax bracket change? The plan calls for reducing the number of tax brackets from seven currently to four: 12 percent, 25 percent, 35 percent and 39.6 percent (many poorer Americans would continue paying 0 percent). Under current tax law, single filers who make between $37,951 and $91,900 pay the 25 percent rate, but the plan would change the 25 percent tax bracket to cover single filers earning between $45,001 to $200,000, for example. Americans who currently make between $91,901 and $200,000 would be pushed into the 25 percent tax bracket, instead of their current 28 percent or 33 percent bracket.

How would the tax plan help families? The standard deduction will increase to $12,000 for individuals and $24,000 for married couples, or almost double the current standard deductions. The proposal also increases the child tax credit to $1,600 from $1,000. It also provides a $300 credit for non-child dependents, such as spouses. Nevertheless, child welfare advocates say the measure doesn't go far enough to help children, with Andy Stettner, a senior fellow at The Century Foundation calling the higher child tax credit "a half measure." 

"The drop in federal revenues will jeopardize critical investments in education, healthcare, and social services for tens of millions who need them most," Stettner said in a statement.