This is part of our educational blog series, “The Short Form,” on simplifying tax problems and exploring the world through the lens of tax policy. Learn more about taxes with TaxEDU.
Earlier this month, House Republicans released a major tax reform package that would temporarily lower taxes for businesses and individuals. The House GOP tax plan tries to encourage businesses to invest and give individuals and families some relief from inflation. It does both imperfectly, but some provisions are a step in the right direction.
What does the plan do well?
The package would reinstate deductions for companies to recover the cost of their investments.
Why is this important? In general, improving investment incentives helps boost the economy, create more jobs and stimulate innovation.
Imagine that a medical device company invests $1 million in developing new technology. Under the bill, they could deduct the entire $1 million from this year’s taxable income, rather than spread it out over multiple years and lose money due to inflation and time value of money. This allows the company to make more investments, grow the business, and produce better and cheaper products.
In addition, the House GOP tax plan would improve accountability for Opportunity Zones, a program to incentivize investment in economically distressed areas, with better reporting standards.
What’s wrong with the plan?
The main problem with the bill: it’s temporary. Both the commercial and individual provisions expire in 2025, so it does not create a long-term benefit to the economy, wages, or jobs.
The bill tries to help individuals and families by increasing the standard deduction, but this is not the best way to provide targeted inflation relief. In fact, it creates little or no benefit for low-income households, the groups that need help the most, because many already have little or no taxable income.
The bill also retroactively it changes business deductions, which decreases the money the government receives without providing any economic benefit (because businesses can’t go back in time and invest more).
The plan is virtually revenue neutral, meaning that the total amount of money raised remains the same despite changes in the way it is collected. That’s because its changes are temporary (not good) and because it cuts other (legitimate) expenses.
And as for the Opportunity Zones, the plan would expand them before The results of the new reporting requirements come in, that is, before we know if they are working or not.
How would it affect me?
If you pay federal income taxes, you probably pay a little lessregardless of which tax bracket you are in, and you may be in a lower tax bracket. Business owners could also fully deduct their investment costs through 2025. But the benefits are modest and go mostly to middle- and upper-middle-class people.
The changes would temporarily boost the economy, but it would return to normal once the policies expire.
Would the tax cuts pay for themselves?
When people say a tax cut it pays itselfThey generally mean that the economic growth produced by the cut, including the jobs created and the taxes paid on the additional wages, generates enough additional revenue in the long run to offset the initial losses. For the GOP tax package to pay for itself on those terms, it would have to raise enough money to offset the tax cuts through additional economic growth alone.
The tax cuts in the reform package do not pay for themselves, but they are paid because they expire and because the package reduces spending elsewhere.
Why does this matter?
A great debate on fiscal policy is coming. In 2025, many of the changes in the Republicans’ 2017 tax law will expire, leading to a large tax increase on all unless Congress acts. This package shows the priorities of the House Republicans.
While the House GOP tax plan is headed in the right direction, it could be better. For example, legislators should permanently allow companies to deduct the full cost of their investments, a policy with a high economic return.