For years, Republicans have argued that federal taxes and spending levels are too high. Now, with a Republican president and majorities in the House and Senate, it’s time to back those words with action. On Thursday, Congress released its plan for the first major tax code overhaul since 1986.
The Tax Cuts and Jobs plan would reduce the number of federal tax brackets from seven to four, and cut tax rates in almost every bracket. It would nearly double the standard deduction and eliminate most other deductions, including the personal exemption. Individuals earning up to $90,000 annually would now be taxed at a rate of 12 percent – down from 25 percent today.
The corporate tax rate would drop from 35 percent – the world’s highest – to 20 percent.
It also creates a new special tax rate for S-corps, sole proprietorships, and pass-throughs at 25%. That’s meant to protect small businesses from paying the higher individual income tax rates. Pass-through entities are now the most common business form in the country, and more than half of Wisconsin’s workforce is employed by a pass-through business.
Under current law, the earnings of businesses organized as pass-throughs are taxed under the individual income tax code, rather than the corporate code. As a result, many individuals see their business earnings taxed under the highest-possible 39.6 percent rate.
Besides the significant tax rate reductions, the plan would eliminate many itemized deductions.The authors estimate that the number of taxpayers itemizing their deductions would fall to fewer than 10 percent, from about one-third today. That’ll add up to significant savings from simplification alone. Perhaps most significantly, federal taxes will be so simple that Americans can file them on a form the size of a postcard.
The estate tax, also known as the death tax, would be repealed in six years. For now, the size of the exemption would double.
The plan would eliminate the federal alternative minimum tax, also known as the AMT. Most other deductions, including those for medical expenses, student loan interest, and state or local income or sales tax, would be eliminated.
All told, the proposal would amount to a $1.51 trillion net tax cut over ten years. If passed, the major changes would generally be effective for tax years beginning after 2017.