New Republican Tax Plan: What to Expect

Tax plan proponent Mitch McConnell at CPAC 2014. (Unmodified Creative Commons photo by Gage Skidmore. bit.ly/1p2b8Ke)

In late September Republicans released a new tax plan that will find its way in front of Congress in the coming months.

This proposed tax plan is important because it may provide the platform under which individuals and corporations would be taxed for its duration.

In understanding the proposed tax plan, it is important to begin by reviewing the effects on the vast majority of taxpayers and then proceed to evaluate the impacts on fringe incomes.

The proposed plan is very much a continuation of an overused Reaganomics model which intends to “simplify” tax codes such that a tax form could “fit on an index card”.

The plan begins to accomplish this by first breaking income tax brackets from seven into three; at rates of 12 percent, 25 percent, 35 percent, and an option for a fourth higher rate.

Experts have yet to release a full and credible analysis on the complete impact of truncating the number of income brackets, however, at the very least those who had an income tax rate of 39.6 percent (the highest) would now have their rate reduced to 35 percent, while those with the lowest income tax rate of 10 percent (the lowest) would find their tax rate hiked up to 12 percent.

One of the largest impacts of the plan is a doubling of the standard deduction. According to an article by the New York Times, doubling the standard deduction would allow at least 70 percent of filers to decrease their total amount of taxes paid, should they continue with the new standard deduction rather than an itemized deduction.

The Republican tax plan intends to counter such a drop in tax revenue by eliminating the state and local tax deductions, which affects those in states with average higher incomes.

Consistent with the Republican idea of “strengthening business,” the plan intends to lower the corporate tax rate from 35 percent to 20 percent. The plan hopes to pay for such a drastic cut by eliminating as many tax credits from businesses to reach a null loss of revenue from corporations.

According to the previously referenced article by the New York Times, a study from the Tax Foundation noted that the elimination of all tax credits could only warrant a corporate tax rate as low as 28.5 percent without large budget cuts.

In addition, the plan hopes to implement a business owner pass through, which appeals to small businesses established as LLCs by lowering the taxable rate from 39.6 to 25 percent for small-business owners falling into the top income bracket.

It is logical that debate over this facet of the plan will largely hinge upon Republican abilities to appeal to Democrats who represent areas with a large proportion of upper-middle class constituents.

The net effects of this plan intend to offer cuts in as many up-front areas as possible at the expense of removing as many back-channel methods of tax deductions and credits to “balance” the budget. The full effects of this proposed tax plan are still largely unclear, however, a knee-jerk reaction would suggest that it will be largely impossible for this tax plan to be implemented without large governmental revenue losses or large budget cuts, both of which are feasible, but rhetorically unpopular.

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