As taxpayers and policymakers consider the prospects for federal tax policy in 2021, it is important to consider how existing tax laws may change in 2021 and over the next five years. While many tax changes for individuals and businesses were incorporated into tax law in the coming years, the latest claim that low and middle income Americans could experience a “stealth tax hike” in 2021 due to the Tax Cut and Employment Act (TCJA) is wrong.
In discussing the upcoming tax changes due to the TCJA, economist Joseph Stiglitz argues that “People with incomes between $ 10,000 and $ 30,000 – nearly a quarter of Americans – should pay a higher average tax rate in 2021 than they did in years before the tax cut passed. Stiglitz points to estimates by the Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) that individuals earning between $ 20,000 and $ 30,000 could owe an additional $ 365 in 2021.
However, taking into account the JCT estimates for 2021 requires important context about what this change in tax liability shows. The TCJA reduced the individual mandate of the Affordable Care Act (ACA) to $ 0, reducing the incentive to purchase qualified insurance and receive appropriate tax credits, especially for those on lower incomes. The reduction in premium tax credits appears as a tax increase for low-income individuals in the JCT distribution tables.
While it is important to consider the impact of the TCJA on premium and health insurance benefits tax credits, it is misleading to refer to this effect as an “increase in stealth tax.” The decline in premium tax credits has nothing to do with a change in tax rates or the generosity of the credits set under the ACA, but is a result of voluntary decisions that individuals make about getting quality health insurance.
If the functional cancellation of the individual mandate is excluded, individuals across the income spectrum will have higher after-tax incomes due to the TCJA compared to previous laws. For example, the Tax Foundation originally estimated that in 2021, those in the 20th through 40th percentiles would see after-tax income increase 1.5 percent on a traditional basis, while the bottom 20 percent would see after-tax income increase by about 1 percent would. Tax income.
Although there won’t be a tax increase for individuals in 2021, tax increases are planned for the next six years. The TCJA individual income tax rules are expected to expire in late 2025, along with the expiry of several business tax provisions between 2021 and 2026. The individual provisions that are slated to expire include lower individual income tax rates and the more generous Child Tax Credit (CTC) and the eliminated personal exemption. Companies will face separate tax increases as R&D expenses will have to be amortized over a five-year period starting in 2022, while the full TCJA expense provision will expire at 20 percent per year starting in 2023.
Without action by Congress, individuals will face a higher tax burden in 2026. Therefore, it is important for policy makers to consider how they intend to drive forward the individual regulations and urgent corporate tax changes that have improved the incentives to invest in the U.S. It is also important to clear up any misunderstandings about the impending tax hikes. Ideally, 2021 will be a year of rebound for public health and the economy, and taxpayers will not have to worry about an automatic “stealth” tax hike.
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