A crowd gathered in New York’s Wall Street to protest the tax cut (Photo: Lev Radin)
A bill lowering income taxes for 80 per cent of Americans was passed by the U.S. Senate on Tuesday night and the House of Representatives gave its final approval on Wednesday morning. In reaction, major U.S. corporations pledged Wednesday to deliver bonuses to thousands of U.S. employees, as their tax rate will drop from 35 per cent to 21 per cent.
“By cutting taxes and reforming the broken system, we are now pouring rocket fuel into the engine of our economy,” President Trump said after the House vote.
Among the many companies giving their employees bonuses are AT&T, Boeing and Comcast. AT&T said in a press release that it would give more than 200,000 of its U.S. workers who are union members a special bonus of $1,000.
Boeing announced that it would spend $300 million on “employee-related and charitable investments” because of the tax plan. Comcast is giving $1,000 bonuses to 100,000 “frontline and non-executive employees,” the company announced.
Companies are also increasing the minimum wage for employees, Wells Fargo said it would increase its minimum wage for U.S. employees from $13.50 to $15 and spend $400 million on donations to nonprofits and community organizations in 2018. While Fifth Third Bancorp said it would increase its hourly minimum wage to $15.
The reduction in the corporate rate from 35% to 21% has the potential to spark a boom in business investment and that ultimately lifts the paychecks of average Americans. The last time Congress refurbished the U.S. tax code was in 1986 under former Republican President Ronald Reagan.
Yet only a third of Americans believe that they will see their taxes go down in 2018. Most people believe this is a tax hike, rather than tax cut, and that only the rich will benefit. In reality, as per the Tax Policy Center, the tax bill will lower taxes for all income groups. About 80 percent of people will see a cut in 2018, with only 15 percent facing about the same taxes as previously.
The tax cut varies depending on income for individual taxes. A single person earning less than $9,525 will continue with the same tax rate of 10 percent, according to Fortune. A single person earning between $9,525-$38,700 will get a tax cut of 3 percent. The new tax bracket of $82,500-$157,500 will have a 4 percent cut, compared to the previous $93,700-$195,450 bracket. The state and local taxes (SALT) deductions will be lower, meaning that wealthy Americans in high-tax states will not be able to reduce their federal tax bill.
There are valid criticisms of the tax legislation mainly that it will increase the deficit. By cutting taxes by $1.5 trillion over the next decade, the tax bill will accelerate growth of U.S. federal debt. The debt would rise to between 98 percent and 100 percent of GDP by 2027, according to the Committee for a Responsible Federal Budget (CRFB). The main criticism being that the corporate tax cut could have been smaller while still marking an improvement.
“Armageddon,” House Minority Leader Nancy Pelosi warned, calling it “the worst bill in the history of Congress,” but to keep things in perspective, under current law the federal government is expected to collect $43 trillion in taxes over the next ten years, while spending $53 trillion. That will increase the national debt to $30 trillion by 2028. Under this new tax reform, the federal government will collect $42 trillion in taxes over the next ten years, while spending $53 trillion. That will increase the national debt to $31 trillion by 2028.
Even after this tax cut, the federal government will be collecting 17.6 percent of GDP in taxes, more than the post-war average of 17.4 percent. The problem relating back to the deficit is not the tax cut, it is spending. The spending of 22.2 percent of GDP is considerably more than the 20.3 percent that we’ve averaged since World War II.
Ultimately corporate-tax reform is something that even President Obama supported and reducing the corporate rate will go a long way toward making U.S. businesses more competitive. In addition, the reduction in individual tax rates, together with the doubling of the standard deduction and an increased child tax credit, will put more money back in people’s pockets.