Nearly 450,000 People Fled These 3 Deep Blue States in 2017

Three Democratic-leaning states hemorrhaged hundreds of thousands of people in 2016 and 2017 as crime, high taxes, and, in some cases, crummy weather had residents seeking greener pastures elsewhere.

The exodus of residents was most pronounced in New York, which saw about 190,000 people leave the state between July 1, 2016, and July 1, 2017, according to U.S. Census Bureau data released last week.

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New York’s domestic out-migration during that time period was about the same as it was during the same time in 2015 and 2016. Since 2010, the state’s outflow of just over 1 million residents has exceeded that of every other state, both in absolute terms and as a share of population, according to the free-market think tank Empire Center.

Despite the massive domestic out-migration flow, New York’s net population grew slightly, largely due to high levels of international immigration and a so-called “natural increase”—the difference between births and deaths in a given year. New York’s net migration was about minus 60,000 residents, but the state had 73,000 more births than deaths, resulting in a net population growth of about 13,000.

Illinois was not so fortunate. Long-beset by twin budget and pension crises and the erosion of its tax base, Illinois lost so many residents that it dropped from the fifth- to the sixth-most populous state in 2017, losing its previous spot to Pennsylvania.

Just under 115,000 Illinois residents decamped for other states between July 2016 and July 2017. Since 2010, the Land of Lincoln has lost about 650,000 residents to other states on net, equal to the combined population of the state’s four largest cities other than Chicago, according to the Illinois Policy Institute.

Illinois’ domestic out-migration problem has become a nightmare for lawmakers, who must find a way to solve the worst pension crisis in the nation as the state’s tax base shrinks year after year. Illinois’ Democratic-dominated legislature has tried to ameliorate the situation with tax hikes, causing even more people to leave and throwing the state into a demographic spiral. Illinois experiences a net loss of about 33,000 residents in 2016, the fourth consecutive year of population decline.

“As people leave the state, they take their pocketbooks with them. That means there are fewer Illinoisans to pay the bills,” Orphe Divounguy, chief economist with the Illinois Policy Institute, told the Chicago Tribune. “It’s worrying because if you have a declining population and a declining labor force, you will for sure have a further slowdown of economic activity going into 2018.”

California was the third deep blue state to experience significant domestic out-migration between July 2016 and July 2017, and it couldn’t blame the outflow on retirees searching for a more agreeable climate. About 138,000 residents left the state during that time period, second only to New York.

However, because California was the top receiving state for international migrants, its net migration was actually 27,000. Add to that number a “natural increase” of 214,000 people, and California’s population grew by about just over 240,000, according to the Census Bureau.

Going forward, one factor that could worsen domestic out-migration from New York, California, and Illinois is the newly enacted tax reform bill, which caps state and local tax deductions at $10,000. The limit on the state and local tax deduction is poised to hit taxpayers harder in those states than it will in just about any other.

According to the Tax Foundation, New York, Illinois, and California had three of the five highest tax rates expressed as a percentage of per capita income, with residents paying 12.7 percent, 11 percent, and 11 percent, respectively.

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In Updated Charts, What 8 Seniors’ Tax Bills Will Be With Tax Reform

The Tax Cuts and Jobs Act when signed into law will mean tax cuts for most Americans. Nevertheless, change—even good change—can bring about uncertainty.

Retirees may be the most concerned about what the new tax legislation will mean for them, as most rely on relatively fixed incomes.

But in fact, the Tax Cuts and Jobs Act is mostly good news for retirees. For the most part, they will be less affected than other Americans, as the changes do not affect the way Social Security and investment income are taxed.

Many retirees will in fact benefit from the tax bill’s doubling the size of the standard deduction.

While seniors’ earnings and pension income will be subject to new individual income tax brackets and rates, those changes will mean tax cuts—not increases—for an overwhelming majority of seniors and retirees.

There are three provisions in the new tax law that could particularly affect retirees.

  1. Medical Expenses Deduction

Currently, anyone who has high medical expenses can deduct the portion of those expenses that exceeds 10 percent of their income. So a couple who earns $40,000 in income and has $10,000 in medical expenses can deduct $6,000 of those expenses.

The Tax Cuts and Jobs Act increases the deductible amount to over 7.5 percent of income for 2017 and 2018. In the above example, this would mean a $7,000 deduction.

  1. Personal and Elderly Deductions

Currently, in addition to claiming a $4,050 personal exemption, people over 65 can also claim a $1,250 blind or elderly deduction. The Tax Cuts and Jobs Act maintains the blind and elderly deduction but eliminates the personal exemption and replaces it with a roughly doubled standard deduction.

  1. Other Itemized Deductions

Two of the deductions that have received the most attention are changes to state and local taxes and mortgage interest. The new tax legislation caps state and local tax deductions at $10,000.

For mortgage interest, the final legislation caps the mortgage interest deduction at $750,000, but only for new home purchases. These deductions tend to have less impact on retirees who often have no mortgage or are far enough along in their mortgage payments that they have little mortgage interest.

Retirees typically also have lower state and local income taxes because not all of their income is subject to taxation.

To illustrate just how the Tax Cuts and Jobs Act will affect different retirees, consider these five examples.

Evelyn Thompson

Evelyn is a retired waitress and a widow. She receives an average-level Social Security benefit of $16,000 per year, as well as $11,000 from her husband’s 401(k). She has $10,000 in medical expenses.

Evelyn’s tax bill will not change under the final legislation She does not pay anything under the current tax system, and she won’t pay anything under the new system because it does not change the taxation of Social Security benefits or investment income.

Moreover, the increased standard deduction means that if Evelyn were to receive or earn more income, more of it would not be taxable.

Phillip Olson

Phillip is a retired utility worker. He earned an average income throughout his career, but now receives a significant pension and even saved a little on his own through a 401(k).

His combined retirement income is $50,000 a year, consisting of $18,000 in Social Security benefits, a $28,000 pension, and $4,000 in 401(k) income. Phil has $7,500 in medical expenses, and he currently pays $3,988 in federal taxes.

Phil’s tax bill will go down by $572, or 14.4 percent under the final tax reform legislation (to $3,416).

Phil’s tax cut is primarily the result of lower marginal tax rates on his $28,000 in pension income. In addition, no changes will be made to the taxation of Phil’s $18,000 in Social Security benefits, or his $4,000 in 401(k) income.

Although Phil has $7,500 in medical expenses, the higher standard deduction makes it not worthwhile for him to deduct these expenses, meaning he will face less paperwork and a simpler tax-filing process.

Craig and Grace Graham

The Grahams are a middle-income retired couple with very high medical expenses. Craig was an electrician and Grace was a secretary.

Together, they receive $25,000 a year from Social Security and $50,000 from their 401(k) savings, making for a total income of $75,000. However, Craig’s health has deteriorated significantly and he had to enter a nursing home this year, which resulted in $50,000 in out-of-pocket medical costs.

Because all of their income comes from Social Security and investments—which the new tax legislation does not change—the Grahams’ tax bill will not change under the new Tax Cuts and Jobs Act. In each case, they owe nothing in federal income taxes.

Since the Grahams already owe no federal income taxes, they do not benefit from the new tax reform bill’s temporary increase (for 2017 and 2018) in the medical expenses deduction—from the current law’s amount exceeding 10 percent of income to the new legislation’s amount exceeding 7.5 percent of income.

Michael and Sarah Lee

The Lees are a semi-retired, upper-income couple. Michael was a writer and Sarah was an attorney, but both still do some contract work on the side.

The Lees have a combined income of $150,000 a year, consisting of $50,000 in earnings, $50,000 in Social Security benefits, and $50,000 in investment income from their 401(k)s. They have $15,000 in out-of-pocket medical expenses, and currently pay $15,613 in federal income taxes.

Under the new tax rates and rules, they will pay $2,059, or 13.2 percent less (their federal income tax bill would be $13,554).

The Lees’ taxable income declines slightly due to the higher allowance for medical expense deductions, but the main source of their tax cut is the tax legislation’s lower tax rates on their earned income.

Hector and Carmen Garcia

The Garcias are a wealthy retired couple. At one time, they jointly operated their own real estate development company, which they have since passed on to their children.

The Garcias have accumulated significant savings, and they receive $950,000 in investment income each year along with $50,000 in Social Security benefits. The Garcias make generous charitable donations of $100,000 a year, they have $25,000 in medical expenses, and they pay about $79,000 in state and local taxes.

Although the Garcias do not need all of their income to cover their own expenses, they enjoy using their wealth to help their children with their business ventures, to support some family members who live outside the U.S., and to contribute to each of their 10 grandchildren’s college accounts.

Under the current tax system, the Garcias pay $151,768 in federal income taxes. Under the new tax system, their taxes will increase by $12,149, or 8 percent (to $163,917).

This increase comes from a loss of all but $10,000 of their state and local tax deductions.

While the Garcias would lose these deductions, they would keep the full value of other deductions—such as for charitable donations and mortgage interest. That is because the Tax Cuts and Jobs Act eliminates the phase-out of itemized deductions that currently takes some (up to 80 percent) of their deductions.

Good Changes for Most Retirees

Understandably, many retirees may be concerned about how the new Tax Cuts and Jobs Act will affect them. But the bare facts of this new legislation should be reassuring: tax reform, for the vast majority of American seniors, is great news.

Moreover, although not represented in seniors’ individual income tax bills, the corporate and small business tax provisions contained in the new tax legislation  will benefit seniors both through their investment incomes and their purchases.

That’s because the benefits of lower corporate taxes flow to individuals who own stock in those corporations, workers who are employed by those corporations, and consumers who purchase goods and services from those corporations.

Once the Tax Cuts and Jobs Act has been signed into law, nearly all American seniors will be able to see that this bill is a win for them.

 

The post In Updated Charts, What 8 Seniors’ Tax Bills Will Be With Tax Reform appeared first on The Daily Signal.

Companies Announce Bonuses, Raises Following Tax Reform Legislation Passage

Multiple businesses are announcing bonuses and benefits for their employees due to Congress’ passage of Republicans’ tax reform bill.

AT&T has announced that it would give a special $1,000 bonus to over 200,000 AT&T U.S. employees and will invest $1 billion in the economy, and Boeing announced a $300 million investment.

“On behalf of all of our stakeholders, we applaud and thank Congress and the administration for their leadership in seizing this opportunity to unleash economic energy in the United States,” Dennis Muilenburg, Boeing chairman, president, and chief executive officer, said in a statement. “It’s the single-most important thing we can do to drive innovation, support quality jobs, and accelerate capital investment in our country.”

Additionally, CVS announced it would hire 3,000 additional workers and FedEx announced it would increase its hiring.

Comcast announced Wednesday that due to Republicans’ tax overhaul and the Federal Communications Commission repeal of Obama-era net neutrality rules, 100,000 employees would receive a $1,000 bonus.

“Based on the passage of tax reform and the FCC’s action on broadband, Brian L. Roberts, chairman and CEO of Comcast NBCUniversal, announced that the company would award special $1,000 bonuses to more than one hundred thousand eligible frontline and non-executive employees,” Comcast said in a statement.

Fifth Third Bancorp announced it would give over 13,500 employees a bonus and raise its employees minimum wage $15 an hour, and Wells Fargo announced it would give $400 million in donations next year as well as raise its minimum wage to $15 an hour.

“This is just the first wave of many such stories,” Adam Michel, policy analyst for economic studies at The Heritage Foundation, told The Daily Signal in an email. “These announcements show that businesses across America will put their tax cut to good use.”

The final tax reform bill, passed Wednesday  224-201 by the House,  maintains the current number of brackets, seven, but lowers the rates to 10, 12, 22, 24, 32, 35, and 37 percent.

It caps the state and local tax deduction, which allows taxpayers who itemize instead of taking the standard deduction to deduct from their federal taxable income any property and income taxes paid to state or local governments, at $10,000.

The bill repeals Obamacare’s individual mandate, and also increases the current $1,000 child tax credit to $2,000 and gives a $500 credit for non-minor child dependents.

The legislation reduces the federal corporate tax rate from 35 percent to 21 percent and repeals the corporate alternative minimum tax but leaves in place the individual alternative minimum tax and increases the exemption.

>>> In 1 Chart, What’s in the Final Tax Reform Bill

Even better news from the country’s businesses is yet to come, Michel added.

One-time bonuses are great news, but the real benefits are still in the future. As businesses and their competitors begin to increase investment in the U.S., workers’ yearly wages will also go up. It is the long-run benefits of tax reform through a larger and more dynamic economy that Americans should be most excited about.

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Taxpayers Could See Benefits from GOP Tax Bill As Early As February

Taxpayers could see the benefits from Republicans’ tax reform as early as February, one tax expert says.

“Certainly early next year, February probably, businesses will start deducting less from employees’ paychecks, and so there you will see a benefit, you will have higher take-home income when your employer is sending less of your money to Washington,”  Adam Michel, policy analyst for economic studies at The Heritage Foundation, told The Daily Signal in a phone interview.

In a final 224-201 Wednesday vote, the House sent the bill to President Donald Trump’s desk for his signature.

Trump has made passing tax reform a major goal of his first year in office.

Michel said he expects businesses to see the benefits from tax reform in the next year.

“Businesses will start adding more jobs and investing more in the United States immediately, and those effects, we will probably be able to see them in the data within a year, and they’ll probably be fully materialized over the course of the following several years, but the indicators will start trending up within 12 months or so, I would presume,” Michel said.

But if you’re ready for a simpler tax code, you’ll have to wait for filing in 2019.

“When they file their taxes this spring, they’ll actually be filing last year’s tax bill, so nothing will change there,” Michel said. “Then, in 2019 when people are filing for 2018, which is this first year when tax reform will be going in, then that’s when they’ll actually see the simplification of just being able to take the larger standard deduction and those types of reforms.”

The final tax reform bill maintains the current number of brackets, seven, but lowers the rates to 10, 12, 22, 24, 32, 35, and 37 percent.

It caps the state and local tax deduction, which allows taxpayers who itemize instead of taking the standard deduction to deduct from their federal taxable income any property and income taxes paid to state or local governments, at $10,000.

The bill repeals Obamacare’s individual mandate, and also increases the current $1,000 child tax credit to $2,000 and gives a $500 credit for non-minor child dependents.

The legislation reduces the federal corporate tax rate from 35 percent to 21 percent and repeals the corporate alternative minimum tax but leaves in place the individual alternative minimum tax and increases the exemption.

>>> In 1 Chart, What’s in the Final Tax Reform Bill

Support for the new Republican tax law has increasingly grown in recent days, with the office of Senate Majority Leader Mitch McConnell, R-Ky., sending out an updated list Tuesday night of 255 groups who have expressed support for Republicans’ tax reform.

The list, originally released Dec. 1, includes household names such as Allstate Insurance, American Airlines, Best Buy, Comcast, Delta Airlines, FedEx, Ford Motor Company, Home Depot, Target, and Verizon.

Following the House’s Wednesday vote, AT&T announced that it would give a special $1,000 bonus to over 200,000 AT&T U.S. employees.

The last time Congress updated the tax code was in 1986, with President Ronald Reagan’s Tax Reform Act.

The post Taxpayers Could See Benefits from GOP Tax Bill As Early As February appeared first on The Daily Signal.

In Updated Charts, How These 7 Taxpayers’ Bills Will Change If Tax Reform Is Signed Into Law

With lawmakers poised to pass the Tax Cuts and Jobs Act—a sweeping tax reform package—many individuals and families will see very different tax bills come 2018 and beyond. In general, an overwhelming majority of Americans’ will pay less in federal taxes.

So how will you fare under the GOP tax plan?

Well, on net, most Americans will see a significant tax cut, including virtually all lower- and middle-income workers and a majority of upper-income earners.

The Tax Cuts and Jobs Act will, on average, provide immediate tax cuts across all income groups, according to analysis from Congress’ Joint Committee on Taxation.

This analysis does not, however, show how those tax cuts would vary based on factors such as total income, type of income, number of children, and itemized deductions.

Among the new tax law’s most beneficial components is a significant reductions in business tax rates. This will help make America more competitive with the rest of the world, and will result in more and better jobs as well as higher incomes for American workers. The Act will also put more money back into the paychecks and pockets of most Americans.

The new tax law does lack some important pro-growth and simplification components, however. It does not go far enough in eliminating deductions and loopholes or in reducing the top marginal tax rate. It adds a discrepancy between the top rate for individual versus pass-through and small businesses and adds some complicated business provisions. It also fails to eliminate the Alternative Minimum Tax and it phases out and eliminates some tax cuts for budgetary reasons.

To get a better idea of how some workers, families, and small businesses will fare under the new tax code, The Heritage Foundation has estimated the tax bills of a range of taxpayers under current tax law and under the GOP’s final version of the Tax Cuts and Jobs Act.

Tom Wong: Single teacher with median earnings of $50,000 per year. Under the current tax code, Tom pays $5,474 each year in federal income taxes. His tax bill will decline by $1,104, or 20 percent, to $4,370 under the new law.

These tax cuts come primarily from a higher standard deduction of $12,000 and from lower marginal tax rates. Currently, Tom’s marginal tax rate is 25 percent. But under the new law, his tax rate will be 12 percent.

John and Sarah Jones: Married couple with three children, homeowners, and $75,000 in annual income. John is a sales representative and earns an average of $55,000 a year. Sarah is a registered nurse. After having children, Sarah cut back to part-time work and she earns $20,000 a year. Under the current tax code, John and Sarah pay $1,753 each year in federal income taxes.

But under the new tax law, their tax bill will decline by $2,014, or 115 percent, (to $0, plus a refundable credit of $261).

Even though John and Sarah would have more taxable income under the proposed plans (as a result of not being able to claim personal exemptions), they would still receive a tax cut because they would face lower marginal tax rates and receive larger child tax credits.

Their current marginal tax rate will decline from 15 percent to 12 percent, while their $3,000 in total child tax credits will double to $6,000.

The numbers listed in the above example for John and Sarah’s current tax payments assumes John and Sarah own a home and live in a state with average tax levels. Under the current tax code, if they did not own a home but instead rented, their federal tax bill would be higher ($2,375 instead of their current $1,753 tax bill).

This would mean that their subsequent tax cuts—as renters—would be larger—$2,636, or 111 percent. The Tax Cuts and Jobs Act partially limits—by placing a $10,000 cap on state and local tax deductions—an inequity in the current tax code that provides bigger tax breaks to property owners, wealthy individuals, and people who live in high-tax states.

Under the new tax law, however, John and Sarah’s tax bill will be the same regardless of whether they own a home or rent because the larger standard deduction will mean they will not itemize in either case.

Peter and Paige Smith: Married couple with two children, homeowners, $1.5 million annual income. Peter works for a technology startup company and Paige is an accountant. Although Peter’s income fluctuates significantly from year-to-year, this was a big year for his company and he received a very large bonus, bringing his total earnings to $1.4 million. Paige’s stable income of $100,000 provided their family the financial stability they needed for Peter to take a risk and follow his dreams.

Under the current tax code, Pater and Paige pay $439,275 in federal income taxes. Their tax bill will decline slightly, by just $2,431, or 0.6 percent,  to $436,8344 under the new tax law.

Peter and Paige’s taxable income will be higher under the new law because they will lose most of their state and local tax deductions. Their total exemptions and child tax credits will remain the same—at zero—as their income is too high to claim any exemptions or credits under the current code or the proposed plans. They will face a lower marginal tax rate, however.

Under the current tax code, Peter and Paige face a top marginal tax rate of 40.5 percent (39.6 percent, plus the 0.9 percent Obamacare surtax). Under the new tax law, their marginal rate will fall to 37.9 percent (37 percent, plus the 0.9 percent Obamacare tax).

Those marginal tax rates do not include Social Security’s 12.4 percent and Medicare’s 2.9 percent payroll taxes, which can lead to extremely high combined marginal tax rates for second earners that are part of a high-income family like Peter and Paige. Because Paige makes less than Social Security current taxable maximum income of $128,400 (for 2018), her combined federal income and payroll tax rate is 55.8 percent under current law and will fall to 53.2 percent under the new law.

Although Peter and Paige will have about $100,000 more taxable income under the new law because they can only deduct up to $10,000 of their state and local taxes, their lower top marginal tax rate will help eliminate some of the existing tax penalty they face on work and investment.

The above example assumes Peter and Paige live in a state with average taxes. Currently, however, their federal tax bill could be tens of thousands of dollars higher or lower, depending on whether they live in a state with higher- or lower-than-average taxes for them to write off. This is not the case under the new tax law because it caps state and local tax deductions at $10,000 (and at their income level, they would likely claim that full amount in any state).

Jose and Marie Fernandez: Married couple with two children, owners of JM Blinds and Shades LLC, homeowners, $250,000 annual income. Jose owns and manages JM Blinds and Shades manufacturing company. Marie primarily stays home with their young children, but she also helps out significantly with the business when needed. Under the current tax code, Jose and Marie pay $35,588, which is their alternative minimum tax (AMT) amount.

The AMT is a separate tax system, created back in 1982 to make sure that millionaires paid their “fair share” in taxes. However, because the AMT was not indexed for inflation until 30 years after it was enacted, it now hits a significant number of middle- to upper-income Americans with a higher tax bill than they would otherwise pay. That’s because under the current tax code, taxpayers pay the larger of what they owe under the regular income tax system and the AMT.

The new tax law increases the exemption level for the AMT, and significantly raises the income level at which the phase-out of that exemption begins (the phase-out creates a phantom, 35 percent marginal rate in addition to the AMT’s stated 26 and 28 percent rates.

Jose and Marie will still pay the AMT under the new tax law, but their AMT tax bill will decline by $13,619 or 38 percent to $21,969 under the new law.

Although the AMT is a separate tax system that does not include the new 20 percent deduction on small and pass-through business income, Jose and Marie still benefit—indirectly—from the deduction. Without the deduction, Jose and Marie would pay $32,039 in federal income taxes under the new law—a smaller cut of $3,549 or 10 percent. However, the deduction for their small-business income lowers their regular income tax bill under the new law to a level ($20,384) that is below their new AMT tax bill ($21,969). Thus, while they still pay the AMT (which does not provide the small business deduction), Jose and Marie would pay much more in federal income taxes without the deduction.

Jose and Marie’s marginal income tax rate is 35 percent under current law and will decline to 28 percent under the new law. The 28 percent is their AMT marginal rate (absent the AMT, their new marginal rate under the standard income tax would be 19.2 percent, which is 24 percent minus the 20 percent deduction).

Under current law, Jose and Marie make too much to claim the $1,000 per child tax credits. Under the new law, however, they will receive the now-doubled $2,000 per child tax credits.

The above examples seek to show how some common taxpayers—including some wealthy individuals who are less common—would fare under the proposed tax reforms. Actual individuals’, families’, and businesses’ tax bills could vary significantly.

On net, however, most taxpayers—particularly lower- and middle-income taxpayers and businesses—will pay less in total taxes. Even more important than total taxes paid, however, is marginal tax rates. That’s because a lot of decisions are made at the margin.

For example, a worker is far more likely to work an additional hour if it counts as overtime and provides the equivalent of 1.5 hours’ worth of pay. And an individual is more likely to make a $1,000 contribution to his retirement savings account if that savings goes tax-free and means he can put all $1,000 away, instead of first having to pay between $100 and $400 in taxes on the savings.

Lower marginal tax rates are a big driver of economic growth, and the lower the rates, the higher the growth. The new tax law reduces the top marginal tax rate by 2.6 percentage points for individuals, and by as much as 10 percentage points for small and pass-through businesses.

While the proposed tax reforms do not achieve 100 percent of the potential pro-growth impacts that they could, they go a long way in helping to jump-start America’s struggling economy and put it on a pathway toward higher long-term growth. This leaves tax reform an unfinished business. The expiration and phase-out of some of the tax cuts in this plan will provide the opportunity for Congress to enact more of the pro-growth components lawmakers left out of this tax package.

 

 

 

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The Economic Impact of the Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act, which is expected to be signed into law today, would reform the tax code by lowering federal marginal rates for most households, corporations, and small businesses.

We have revised our previous estimates of the House and Senate versions of the bill to reflect changes made by the conference committee. The final version of the Tax Cuts and Jobs Act reduces the corporate tax rate from 35 percent to 21 percent, temporarily reduces tax rates on many non-corporate (pass-through) businesses, and temporarily increases the present discounted value of capital cost recovery allowances for equipment.

We project that the final bill will increase the level of gross domestic product (GDP) in the long run by 2.2 percent. To put that number in perspective, the increase in GDP translates into an increase of just under $3,000 per household. Though we only estimate the change in GDP over the long run, most of the increase in GDP would likely occur within the 10-year budget window.

For reference, we previously estimated that the House bill would increase GDP by 2.6 percent and that the Senate bill would increase GDP by 2.8 percent. The updated estimate reflects changes in the conference bill. The primary differences between this estimate and the previous estimates are the failure of the conference bill to improve capital cost recovery allowances for structures and that the changes to individual income tax rates (including rates for pass-through businesses) expire after the 10-year budget window closes.

The final bill only temporarily changes the rules for expensing of new investment and the income tax rates for households. We calculated the effects of the bill both with and without the expiring provisions. The headline estimate is the simple average of the two, which reflects business’ and households’ expectations that the Congress may or may not allow the temporary provisions to expire. If the expiring provisions were made permanent, then the level of GDP would increase by 2.75 percent, while if the same provisions were to expire, the level of GDP would only increase 1.7 percent.

The changes in GDP occur because of increases in the capital stock and the number of hours worked. We estimate that the final bill would increase the capital stock related to equipment by 4.5 percent, and the capital stock related to structures by 9.4 percent. We also estimate that the number of hours worked would increase by 0.5 percent.

 

House Bill Senate Bill Conference Report (As Reported)
Capital Stock (Equipment) +4.5% +4.6% +4.5%
Capital Stock (Structures) +9.4% +10.9% +9.4%
Labor +0.7% +0.7% +0.3%
Economic Output (GDP) +2.6% +2.8% +2.2%
Annual GDP per household

(2017 dollars)

$4,068 $4,403 $2,962

 

Methodology

Our estimates in this report reflect a corporate tax rate of 21 percent, an average marginal non-corporate tax rate of 22 percent, an increase in after-tax wages of 3.5 percent, and no change in the expensing rules for structures relative to current law. The rest of the estimate is detailed in our previous report on the House and Senate bills.

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House Passes Historic Tax Reform Bill, But Will Have to Vote Again Wednesday

Following the House’s 227-203 Tuesday vote to pass Republicans’ tax-reform overhaul, the legislation will move to a vote in the Senate, expected Tuesday night or Wednesday morning.

“Today is a momentous day for America,” Rep. Mark Meadows, R-N.C., chairman of the House Freedom Caucus, said in a statement. “The forgotten men and women of our country voted to elect President Trump and a Republican Congress to fix our broken tax code that taxes Americans too highly, ships their jobs overseas, and directly undermines the fundamental principles that make America great. Passage of this bill is a monumental step toward doing just that.”

However, since three elements in the House bill violate the Senate’s Byrd rule, according to Business Insider, the House will vote again on a slightly revised tax reform bill Wednesday. The Byrd rule applies to legislation passed through reconciliation, which allows bills to pass the Senate with 51 votes.

House Speaker Paul Ryan said the bill was “one of the most important pieces of legislation that Congress has passed in decades to help the American workers and to help grow the American economy.”

“For all those millions [of] men and women in America who are living paycheck-to-paycheck, who are struggling to get ahead—help is on the way,”  Ryan added. “For all those businesses that are tied with one hand behind their back in this global economy, having a hard time competing—help is on the way.”

Twelve Republicans voted against the bill, which went to conference following the initial House votes Nov. 16 and Senate vote Dec. 2. No Democrats voted for the GOP tax plan.

The final tax reform bill maintains the current number of brackets, seven, but lowers the rates to 10, 12, 22, 24, 32, 35, and 37 percent.

It caps the state and local tax deduction, which allows taxpayers who itemize instead of taking the standard deduction to deduct from their federal taxable income any property and income taxes paid to state or local governments, at $10,000.

The legislation reduces the federal corporate tax rate from 35 percent to 21 percent and repeals the corporate alternative minimum tax but leaves in place the individual alternative minimum tax and increases the exemption.

>>> In 1 Chart, What’s in the Final Tax Reform Bill

The bill also increases the current $1,000 child tax credit to $2,000 and gives a $500 credit for non-minor child dependents, which was reportedly included to secure the vote of Sen. Marco Rubio, R-Fla.

The bill also repeals Obamacare’s individual mandate.

Following the House’s vote, President Donald Trump, who has said he wants to sign a bill by Christmas and made passing tax reform a major goal of his first year in office, congratulated Republican leadership.

According to a Dec. 18 report from the Tax Foundation, the organization estimates that Republican’s tax plan “would significantly lower marginal tax rates and the cost of capital, which would lead to a 1.7 percent increase in GDP over the long term, 1.5 percent higher wages, and an additional 339,000 full-time equivalent jobs.”

The Tax Foundation also estimates that the GOP tax plan would bring $1 trillion in federal revenues from economic growth.

Ahead of the House’s vote Tuesday, Sen. David Perdue, R-Ga., said the Republican tax reform bill will be a boon for middle class families.

“This is indeed a tax cut for the middle class,” Perdue said in an interview on CNBC’s “Squawk Box.” “A family of four, who make the median income of $73,000, are going to get a 60 percent tax cut. A single mom, with one child, making $41,000 is going to get a 75 percent tax cut.”

House minority leader Nancy Pelosi, D-Calif., decried the tax plan, calling it a “scam.”

Rep. Kevin Brady, R-Texas, chairman of the House Ways and Means Committee and the GOP’S top tax writer, praised the passage of the bill.

The last time Congress updated the tax code was in 1986, with President Ronald Reagan’s Tax Reform Act.

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In 1 Chart, What’s in the Final Tax Reform Bill

The Tax Cuts and Jobs Act is the most sweeping update to the U.S. tax code in more than 30 years. The recently released conference report would lower taxes on business and individuals, and unleash higher wages, more jobs, and untold opportunity through a larger and more dynamic economy. The conference report is a serious effort to reform a complex and badly broken system that provides significant tax relief to the vast majority of tax-paying Americans.mplex and badly broken system that provides

The post In 1 Chart, What’s in the Final Tax Reform Bill appeared first on The Daily Signal.

5 Myths About Tax Reform, and Why They’re Wrong

Next week, the House and Senate will take their final votes on tax reform. The president’s goal is to sign the legislation into law before Christmas.

Although there are still some unknown details, the important parts of the bill for most Americans are already known and would greatly improve our current, woefully out-of-date tax code.

The bottom line is that taxpayers across America can expect a tax cut. The bill would lower tax rates for individuals and businesses, double the standard deduction, and significantly increase the child tax credit.

The bill is also pro-growth and pro-American worker. The economy could grow to be almost 3 percent larger at the end of 10 years. That translates to more than $4,000 dollars per household, per year. American families could finally get a real raise.

Americans deserve to know the truth about the proposed tax reform packages. There are several myths going around about what the proposed plan would do.

Here are a few of them, and why they’re wrong.

Myth 1: This is just a tax cut for the rich, and it will actually raise taxes for everyone else.

The truth is in fact the opposite. The Senate tax bill increases the amount of taxes paid by the rich and, according to the liberal Tax Policy Center, 93 percent of taxpayers would see a tax cut or no change in 2019. They found similar results for the House bill.

Both tax bills would actually increase the progressivity of the U.S. tax code. That means fewer people at the bottom will pay income taxes, and people at the top will see their share of taxes paid increase.

The Cato Institute’s Chris Edwards notes that the Senate tax bill cuts income taxes for people making $40,000 to $75,000 a year by about 37 percent. People making over a million dollars see a cut of only 6 percent.

In two recent Daily Signal pieces, we calculated how 12 different taxpayers would fare under each of the tax plans. The results show that almost everyone will see a tax cut, and only the wealthiest families are at risk of their taxes going up.

Under the current tax code, the top 10 percent of income earners earn about 45 percent of all income and pay 70 percent of all federal income taxes. The U.S. tax code is already highly progressive, and these tax reforms will only increase the trend of the wealthy paying more than their share of income earned.

Myth 2: Repealing the individual mandate will raise taxes on the poor, raise insurance premiums, and kill 10,000 people a year.

Only in Washington can removing a tax penalty be considered a tax increase.

Tax reform will likely repeal Obamacare’s individual mandate, which imposes a tax penalty anywhere from $695 to upward of $10,000 for not purchasing the type of health insurance mandated by the federal government.

Depending on income and available health insurance options, the federally mandated health insurance comes with subsidies paid to the insurance company that can range from no more than a few dollars to over $12,000 a year per individual, and upward of $20,000 per year for families.

Repealing the mandate would not force anyone to give up their coverage or forego their current tax credits. It would just make the Obamacare insurance optional, and thus increase health care choices.

Eliminating the Obamacare individual mandate will not reduce any taxpayer’s income by a single cent. It will, however, reduce the tax bills of many individuals and families—based on their own choices—by hundreds, if not thousands, of dollars.

The individual mandate with its penalties is also not the “glue” that holds Obamacare together, as some have claimed. It never was.

“The lifeblood of the law is the generous taxpayer insurance subsidies, which attract and maintain the historically sluggish enrollment,” explains senior Heritage research fellow Robert Moffit. Repealing the mandate will not precipitate doomsday for insurance premiums.

While it is extremely difficult to predict how insurance premiums would change without the individual mandate penalty, we do know that eliminating the penalty will prevent low- and middle-income individuals and families from having to subsidize the high medical costs of others.

One particularly outrageous claim is that due to people voluntarily choosing alternative health care solutions, 10,000 people will die each year because the government is no longer forcing Americans to buy health insurance.

Two economists reviewed these claims and found the exact opposite. They found that there is “poor evidence linking insurance coverage to mortality” and that “the mandate may in fact be elevating death rates in some populations.”

When you factor in the economic growth and higher wages from tax reform, the tax bill could actually save lives.

Myth 3: Corporations and their rich owners will receive a huge windfall.

Politicians who don’t want tax reform claim that cutting taxes for business will only help the rich.

Despite the name—“corporate” tax reform—the burden of the corporate income tax falls almost entirely on workers in the form of lower wages. Americans are undoubtedly skeptical about this claim, but the realities on the ground are actually quite simple.

When business taxes go down, worker’s wages go up.

That’s not just the result of corporate benevolence. Rather, wages rise because higher profits translate to additional investments that make workers more productive, and businesses that don’t pay workers what they are worth will lose them to competitors who do.

American corporations pay a federal income tax rate of 35 percent—one of the highest in the world. If tax reform can lower that rate to 21 percent, American businesses and the workers they employ will be globally competitive again. Businesses will invest more, hire more workers, and be forced by the laws of supply and demand to raise wages.

This is exactly what happened over the past decade and a half in neighboring Canada. In 2007, Canada began lowering its corporate tax rate. And guess what? Wages grew significantly faster in Canada than other comparable countries.

Most economic researchers agree. A recent review of 10 separate studies published between 2007 and 2015 concluded that, when governments cut corporate taxes, workers receive almost all of the benefit through higher wages.

Myth 4: Tax reform will be bad for seniors.

Retirees may be the most concerned about what tax reform will mean for them, as most rely on relatively fixed incomes.

But, the proposed reforms are good news for retirees. For the most part, they would be less affected than other Americans, as the proposed reforms would not change the way Social Security and investment income are taxed.

Many retirees would in fact benefit from the tax bills’ doubling the size of the standard deduction.

While seniors’ earnings and pension income would be subject to new individual income tax brackets and rates, those changes would actually mean tax cuts—not increases—for an overwhelming majority of seniors and retirees.

Myth 5: Tax reform won’t grow the economy, it will only add to the debt.

Congress rightly allowed the tax reform bill to decrease revenues over 10 years by $1.5 trillion—about 3.5 percent of projected revenue. But such “static” budget scores provide zero useful information about how the reform will actually affect the deficit.

Properly designed tax reform will lead to a larger economy and higher wages. Each of these economic benefits can result in more tax revenue.

A recent Heritage Foundation analysis shows that the Senate tax reform bill could boost the size of the U.S. economy by almost 3 percent over the long run.

Other estimates are even more optimistic. Nine leading economists recently described how the economy could see a boost of up to 4 percent due to tax reform. The President’s Council of Economic Advisors believes the economy could grow between 3 and 5 percent, a range that was independently verified by three economists from Boston University.

Tax reform that grows the economy could result in more than $130 billion of new federal revenue in every year outside the current budget window. And that’s using the most conservative of the estimates above.

More optimistic estimates would bring in well north of $200 billion, making up most—if not all—of the static tax cut once the economy reaches its new larger potential.

Congress’s spending addiction shouldn’t stop tax reform, but the tax cuts will be short lived if Congress continues to increase spending every year.

The fact remains that our deficit cannot be eliminated with tax increases. Believing it can denies the fundamental problem: The deficit is driven by out-of-control spending. Spending is where congressional deficit hawks should turn their attention.

It is true that the proposed tax reform packages would mean big changes for individuals, families, and businesses across the United States. Overwhelmingly, however, these changes would be resoundingly positive.

Lower- and middle-income families would receive the largest tax cuts, and they would be the primary beneficiaries of business tax reforms that would generate higher wages and more job opportunities across America.

The post 5 Myths About Tax Reform, and Why They’re Wrong appeared first on The Daily Signal.