The tax reform bill has been revealed and it calls for some things to stay, minor changes, and major changes. Here is a summary of some important changes that will affect many people.
The new bill keeps 401(k) contributions although they debated slashing the allowed amount from $18,000 pretax to 2,400. Another highly debated deduction was State and Local Taxes (SALT), these will also be kept, although they are getting rid of the sales tax deduction. Corporate Tax rate will be lowered from 35 to 20%. The last major change is the number of tax brackets, from 7 to 3-4.
There is talk of getting rid of the personal/dependency exemption of $4,050 and increasing the standard exemption (thought to be doubled).
Those are just some of the changes discussed in the Fox article. But the affects are what people are worried about. Getting rid of certain deductions will increase taxable income, and the goal is that the increased standard deduction will cover that. The 3-4 tax brackets are supposed to put more money in households pockets and allow them to consume maybe a fraction more and help stimulate the economy. Lastly, decreasing the corporate tax rate will hopefully bring more business to the United States. Companies may be more likely to do more business in the US since their tax liability would decrease, which could offset the decrease in tax rate.
It seems to be that the overall plan is to increase money into taxpayers and companies pockets, maybe to focus on economic growth, which could bring inflation. This proposed plan could be altered even more, so we will see what the effects will be. Considering the talk of tax reform has been prevalent since the primaries.
http://www.foxnews.com/politics/2017/11/02/tax-reform-bill-revealed-by-house-gop-heres-what-it-does.html
Given that spending is relatively low at this point in time, as is inflation, one could argue that a decrease in taxes (coupled with a high consumer confidence) will cause consumers to spend more, leading to growth. One downside, obviously, is inflation, but given the inflation rate is below the preferred threshold of 2%, it does not seem like these tax cuts will cause a huge jump in inflation.
ReplyDeleteIn regards to the talk of nixing the the dependent tax exemption, I don't think that is a change that would be beneficial to the economy. To put it bluntly, kids are expensive. And it's likely that the MPC of those with children is higher than those without, and they would be more likely to put the money back into the economy by spending it.
ReplyDeleteOne of the bigger changes that sticks out to me is the number of tax brackets shrinking from 7 to 3-4. This change could benefit the top 1 % because they would be grouped with people of vastly lower incomes. Also, getting rid of the dependency exemption seems like a major change at first glance, but it could be cancelled out by the standard deduction being doubled. However, cutting dependency exemptions will hurt families that have many dependents. Overall, the tax bill seems like it could put more money back into taxpayers' pockets, resulting in more economic activity.
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