December 22nd marks the third anniversary of the signing of the Tax Cut and Jobs Act, the most comprehensive update of US tax law in more than 30 years.
As the economy continues to recover from the coronavirus-induced recession, policymakers shouldn’t lose sight of how the 2017 reforms resulted in immediate benefits for American workers and, more importantly, the U.S. economy at a have prepared robust recovery.
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The reforms simplified the process of paying taxes, lowered tax rates for individuals and companies, and updated business taxes so that American companies and the people they employ are globally competitive again.
For individuals, the tax cuts lowered federal income tax rates, increased the standard withholding, doubled the child tax credit, removed personal and dependent exemptions, and capped deductions for state and local taxes among many other reforms, among other things.
These must be expanded at the end of 2025.
For businesses, the bill permanently lowered the corporate tax rate from a global high of 35% to 21% and temporarily provides for expenses that allow businesses to fully deduct most new US investments.
The law cut taxes for the vast majority of Americans – 9 out of 10 people saw a tax cut or no change in their pay.
The Heritage Foundation found that the average households in each convention district are expected to benefit from a tax cut of about $ 1,400 in 2018 and $ 2,900 for a family of four.
According to IRS data, the average tax rates for middle-income Americans fell more than those who reported incomes greater than $ 1 million, and the cuts were largest as a percentage of taxes applied to low- and middle-income Americans were paid.
This made tax legislation more progressive and made high-income Americans pay a greater proportion of income taxes than it has since the 1980s.
For all taxpayers, the effective tax rates decreased by an average of 9.5% (around 1.4 percentage points). Americans continue to get these benefits by paying less in 2019, 2020, and in the years to come.
There was also significant time savings and simplifications so that more Americans could take the only, simpler, standard print. Under the new system, the number of people who could collect their own taxes increased by 4.4%.
Before the pandemic, American workers saw the largest wage increases ever, and unemployment was at a 50-year low.
In 2019, real household income hit an all-time high of $ 4,400 (up 6.8% for one year). Income gains have been greatest among minorities and low earners, and as a result, income inequality has decreased.
Between tax cuts and wage increases, the Heritage Foundation calculated that the typical American household would receive an additional $ 26,000 in take-away pay or $ 45,000 for a family of four in the ten years following the tax cuts. Before the pandemic, Americans were well on their way to making these profits.
The tax cuts are expected to fuel the good economic trends primarily through higher business investment, which will lead to more jobs, better technology and, ultimately, productivity gains. Each of these things help boost wages.
In the past, reforms that lower business tax rates and allow more write-offs on investments resulted in increased business activity. Hence, economists expected aggregate investment to pick up after the reforms, and that is exactly what happened.
In the immediate aftermath of the reforms, corporate investment, new business applications and other indicators such as business confidence exceeded expectations. For example, immediately after the tax cuts were signed, net private investment rose 32% year-on-year.
Uncertainty over trade and tariffs in the years that followed resulted in investment falling back below pre-tax reform projections. The trade war and now a global pandemic seem to be hiding the tremendous successes of the 2017 tax cuts.
Building on growth-enhancing successes for recovery
The 2017 tax cuts offer two underestimated benefits and help the economy weather the current crisis.
While we still have a long way to go, the economy has consistently outperformed economic projections, in part due to growth-enhancing policies in place before the crisis.
The 2017 law increased the cash available to businesses by lowering tax rates and allowing access to foreign profits. In the two years following the tax cuts, companies have repatriated more than $ 1 trillion in foreign revenues.
These and other sources have likely given a lot of the economy an extra cushion to fall back on over the past nine months.
Second, the structural reforms that encourage higher business investment are not going away in a pandemic. Due to lower trade tax rates and expenses, investing companies invest a little more than usual.
In the months and years ahead, Congress must receive the profits from the Tax Cut and Employment Act. From 2022, the growth-enhancing reform – full spending – will gradually expire, and three years later the lower tax rates for small businesses and individuals will expire.
Political pressure from the left and rising deficits are already threatening the profits from the tax reform.
Without budget reforms to control spending growth, businesses, families and investors can expect tax hikes in the future.
By rejecting unsustainable growth in government spending and permanently introducing tax cuts for 2017, lawmakers can promote the conditions for a strong economy in the years to come.