The Senate Republican tax plan, explained

This week Senate Republican leaders are careening toward a vote on their tax proposal, mere weeks after House Republicans passed theirs.

The plan, crafted by Senate Finance Committee Chair Orrin Hatch and Majority Leader Mitch McConnell, would slash corporate tax rates permanently, offer temporary cuts for individuals, and repeal the individual mandate in Obamacare, a $338 billion health care cut that leaves 13 million more people uninsured by 2027. The result is that, by that year, when the individual cuts expire, most Americans will be worse off due to higher taxes and lower health care coverage, while rich people who own shares in corporations will continue to benefit.

The bill differs markedly from the House proposal. Both the fact that all the cuts for individuals expire at the end of 2025, and the mandate repeal, are new to the Senate proposal. There are milder changes too. The Senate bill would retain seven individual tax brackets instead of consolidating them into four as in the House plan. It would delay the corporate tax rate cut until 2019, saving billions in 2018. It would cut but not eliminate the estate tax. It cut taxes for “pass-through” businesses in a slightly different way. It features a lower top rate for individuals, and would dramatically expand access to the child tax credit to help rich families.

All told, though, the plan is, like its House counterpart, a proposal to dramatically slash corporate tax rates, open up a big new loophole for wealthy individuals, and pay for the cuts by dramatically expanding the national debt and ending a number of tax deductions that could leave a substantial share of middle- and upper-middle-class people paying more. It just adds a big health care cut on top of that.

It does little to expand the refundable child tax credit, and so does next to nothing for the roughly 44 percent of Americans who don’t pay federal income taxes. When the health care changes are included, it becomes a net loser for the poor. For everyone else, it’s a mixed bag.

The bill’s unusual design is meant to conform to Senate rules, which ban legislation from increasing the deficit after 10 years. The Senate bill as currently written doesn’t increase the long-run deficit, as its individual tax cuts phase out, and its permanent corporate cuts are paid for by cutting health care and some mild tax increases on individuals. But Senate leaders are still wrangling votes, and the exact structure of the bill could change significantly in order to win over skeptical Republican legislators.

Who gets tax cuts, and tax hikes, under the bill

Before delving into the bill’s details, it’s worth taking a moment to consider who, all told, comes out ahead and behind.

The nonpartisan Tax Policy Center has modeled the effects of the legislation as passed by the Senate Finance Committee on November 16 and estimated how it affects each income group on average. Here’s the big picture:

The story is very different in 2019 and 2025 compared to 2027, because at the end of 2025 all cuts for individuals expire. However, a significant tax increase — the use of a slower-growing inflation index, chained CPI, to adjust tax brackets — remains, as do corporate tax cuts. That means that rich and very rich people who own many shares of stock gain tremendously still, but middle and upper-middle class individuals who had been benefiting from individual rate cuts lose out.

The above chart is actually too generous, in some ways, to the Senate plan, because it excludes the effect of eliminating the individual mandate, which effectively reduces the amount of Medicaid and insurance subsidy money going to poor and middle-income people, and increases premiums on many upper-middle-class people too. On net, the poor would actually lose out, not modestly gain, in all years once this effect is taken into account.

With that caveat in mind, you can see the effects of the bill in more granular detail in the following table. TPC finds that the top 1 percent of taxpayers earn 61.8 percent of the benefits from the cuts by 2027, and the top 0.1 percent earning 39.8 percent of the benefits:

But these averages obscure important differences within income groups. Some people earning $200,000 a year will pay less in taxes in 2027. But others will pay more, which can be obscured by a finding that, say, the 80-90th percentiles as a whole will get a $340 tax cut on average.

TPC modeled out for 2019, 2025, and 2027 what share of each group will see taxes go up and down. Here’s 2027:

Overall, 50.3 percent of taxpayers see their taxes go up, with an average hike of $170; but 28 percent see their taxes go down, by $1,640 on average.

These percentages vary widely between income groups. Within the middle quintile, people earning $54,700 to $93,200 a year, 65.6 percent would see their taxes go up. But only about 1.8 percent of the very richest one thousandth of Americans would see a tax hike.

Note, again, that this doesn’t take into account the effect of cutting health care.

Republicans argue that 2025 is a better year to look at than 2027, as they argue that, despite writing the bill so that individual cuts expire, they hope to make them permanent in the future. While it’s somewhat disingenuous to demand that your bill be evaluated not as it’s written, but as it might be amended at some later date, here in the interest of fairness is TPC’s 2025 projection:

74.1 percent of Americans get a tax cut, and the average American household in the middle quintile would get a $880 cut. But 12.2 percent of Americans would see taxes go up, with hikes concentrated in the upper-middle class and among the very rich. Only 22 percent of the benefit would be concentrated in the top 1 percent (far lower than in 2027), but 63.7 percent goes to the richest fifth of Americans.

The bill would good for corporations and the wealthy

Before delving into the bill’s details, it’s worth taking a moment to consider who, all told, comes out ahead and behind. Here’s who would be better off:

But the bill would hurt the poor and increase the deficit

The GOP’s tax reform proposal would leave other groups worse off:

Individual income tax rates are adjusted

Unlike the House bill which consolidated the tax brackets from seven to four, the Senate bill would keep seven individual income tax brackets but adjust them:

The standard deduction is increased, personal exemptions are eliminated, and the child tax credit is mildly boosted

Standard benefits for families are changed significantly, with an eye toward simplifying the vast array of benefits (standard deductions, personal exemptions, child credits, etc.) currently available:

Some deductions are limited, but most remain intact

Corporate taxes are slashed dramatically

Pass-throughs like the Trump Organization win big

“Pass-through” companies like LLCs, partnerships, sole proprietorships, and S corporations, which are overwhelmingly owned by rich individuals like Donald Trump and currently pay normal income tax rates after their earnings are returned to the companies’ owners, would get a number of tax cuts too:

Two other significant tax provisions are changed or abolished:

And a brand new 1.4 percent tax on university endowment income is added, just as in the House bill.

The case for the bill

For the public at large, the case for a massive corporate tax cut is sort of hard to grasp. Seventy-three percent of Americans, and 53 percent of Republicans, say they want corporate taxes either kept the same or raised, according to Pew Research Center polling. That the cuts are paired with some tax increases on individuals, like the elimination of the deduction for state and local income taxes and the Social Security number requirement which kicks some 3 million kids off the child tax credit, makes the choice even more confounding.

But the GOP has a specific economic theory that it claims supports the bill and makes the changes it envisions worthwhile.

The basic idea is that while most economists believe corporate taxes are primarily paid by owners of capital (that is, people who own stock in corporations) in the form of lower profits, a sizable minority, including White House chief economist Kevin Hassett, think that a lower tax rate would spark so much additional investment in the United States that it would bid up wages and leave the middle class better off through its indirect effects.

Other, smaller provisions of the reform package also have reasonable cases for them. Opponents of the state and local tax deduction, which the bill would largely eliminate, argue it’s regressive and concentrates benefits on rich states rather than poor ones that actually need the money. The current mix of standard deductions, personal exemptions, and child credit is needlessly duplicative, and the bill simplifies it a bit, while creating new winners and losers.

Others are a bit harder to defend. Many economists oppose wealth taxes like the estate tax on the grounds that they penalize savings, but intergenerational transmission of wealth also has huge negative externalities (heirs less willing to work, less equal politics, etc.) that cutting the estate tax dramatically would worsen.

Cutting taxes on pass-through income is particularly hard to defend. Pass-throughs already get a sizable tax advantage relative to other companies. While corporate profits are taxed in two stages — first by the corporate income tax, and then through dividend or capital gains taxes — pass-through income is only taxed once, at the individual level. This change would worsen that advantage.

Pass-throughs will counter that in many cases, people who own stock through 401(k)s and IRAs don’t have to pay capital gains or dividend taxes, and so their profits are only taxed at the corporate rate, which is lower than the top individual rate (and would be much lower under this plan), putting pass-throughs at a potential disadvantage. But analysts who’ve looked at this comparison generally conclude that pass-throughs are taxed less overall, and certainly don’t need another break.

Where the bill goes from here

The Joint Committee on Taxation has scored the bill as costing $1.495.7 trillion, just under the $1.5 trillion the GOP budget set aside for tax reform.

But due to the phase-out of most individual provisions, it will likely stop increasing the deficit after 10 years. Indeed, JCT finds that it raises revenue by the tenth year.

The legislation will face a lot of pressure to expand or protect certain cuts, and to abandon certain pay-fors. Blue-state Republicans like Susan Collins are fighting the limit on property tax deductions, Collins and Kansas Sen. Jerry Moran have expressed worries about including the individual mandate repeal, and just about every business will fight for as much as it can get in corporate tax cuts and pass-through cuts, with Sen. Ron Johnson from Wisconsin championing pass-throughs in particular. (The fact that lobbying firms are organized as pass-throughs might mean trouble for the rule eliminating pass-through privileges for law firms.)

All of that makes the bill more expensive, and harder to pass.

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