The House and Senate have resolved the differences in their tax relief bills and are likely to pass the Tax Cuts and Jobs Act (HR-1) before Christmas. No Democrats have expressed support for the plan, which is a dramatic departure from tax changes in the past. Democrats have chosen to fall in line with minority leaders Nancy Pelosi and Charles Schumer, who have called on them to “resist” the Trump agenda.
John F. Kennedy tax cuts. President Kennedy inspired the title of this column with his famous quote, “A rising tide lifts all boats.” Facing economic stagnation in 1962, he champion across-the-board tax cuts. He said, “It is a paradoxical truth that tax rates are too high today and revenues are too low – and the soundest way to raise revenues in the long run is to cut rates now.” The tax cut package passed by an overwhelming bi-partisan majority and the economy boomed for the rest of the decade.
Ronald Reagan tax cuts. Reagan entered the White House following a long period of high unemployment, high interest rates and high inflation. He engineered massive tax cuts, cutting the top individual rate from 70 percent in 1981 to 28 percent in 1986. The 1986 bill passed by a 97-3 margin in the Senate. Federal revenue nearly doubled during the Reagan Presidency, and economic growth rates above 4 percent were the norm following the 1982 recession (before the tax cuts were in place).
Bill Clinton capital gains cut. Most people overlook this – President Clinton signed a cut in the capital gains tax (on investment sales) from 28 percent to 20 percent in 1996. That led to the stock market boom of the late 1990s. Capital gains revenue nearly doubled in Clinton’s second term. Curiously, Congress did not include a capital gains cut in the current tax bill.
George W. Bush tax cuts. Learning from the mistakes of his father, who raised taxes and was not re-elected, George W. Bush campaigned in 2000 on reducing taxes. Congress passed a modest across-the-board reduction on individual tax rates and reduced the capital gains rate to 15 percent. Revenue went from $1.99 Trillion in 2001 to $2.57 Trillion in 2007. The “housing bubble” in 2008 led to a downturn in the economy. Just like the Kennedy, Reagan and Clinton tax cuts, lower tax rates brought in more revenue.
The highlights of the Tax Cuts and Jobs Act are lower individual rates and increased tax deductions, a much lower corporate tax rate, and tax advantages for small businesses. Let’s examine each category:
Individual taxes. The top tax rate was reduced from 39.6 percent to 37 percent. Other individual rates will be lowered and the income thresholds for the various tax brackets will be expanded. The standard deduction will nearly double to $12,000 for individuals and $24,000 for married couples. The child tax credit will double to $2000. Medical expenses above 7.5 percent of gross adjusted income (after deductions) may be deducted, as well as interest on mortgage loans of up to $750,000.
Corporate taxes. The top corporate rate will go from 35 percent (highest in the industrialized world) down to 21 percent, making American companies much more competitive. The lower rate will bring down production costs and lower consumer prices. There will also be a lower rate on overseas profits that are repatriated to America.
Small businesses. There are 30 million small businesses in America with 58 million employees. They pay taxes on profits at the individual rate. The new tax law allows the owner or partnership to deduct 20 percent from the first $315,000 in profits and lowers the top rate from 39.6 percent to 29.6 percent. It also allows a complete deduction on equipment purchases.
President Trump estimates that the legislation will save the average family of four with $75,000 in combined income about $2000 a year. Economic projections also predict wage growth of $4000 a year due to lower business taxes. See his comments here: www.whitehouse.gov/articles/americans-need-tax-reform/.
There are 10 Senate Democrats who will be on the 2018 ballot in states won by President Trump. They will likely regret their decision to “resist” tax cuts.
John Steinberger is the editor-in-chief of LowcountrySource.com. To contact him, email John@LowcountrySource.com.
