When it comes to the United States, there are few things as certain as taxes. Regardless of extenuating circumstances, paying taxes is about as mandatory as stopping when a police officer pulls you over. Meaning, you could choose not to, but it will inevitably land you in jail.
These are the times of change for the tax code as we know it.
Although the current tax code, in some variation of it, has been in effect for the past century, it will soon be noticeably modified. The new administration has finally completed this long-lasting endeavor that will come into effect in 2018. So, what do experts like CPAs and tax specialists think about it?
What happens with the enormous deficit?
In order to implement the new tax code, the government will have to deal with a $1.5 trillion deficit. Since the largest decrease happens in the area of corporate tax, it is these entities that are mostly responsible for such an astronomical number.
In words of Larry Simmons, a tax expert who works for Business & Financial Solutions, this “puts programs like Medicare and social security at risk”. Controversially, the lower-earning families will be the ones most affected because their reductions are not designed to last forever. On the other hand, corporations will enjoy the new 21% cut permanently.
Another problem with the large deficit comes from uncertain predictions. As you may be aware, most Republicans are anticipating great success from the passage of this bill. Such a success, actually, that the $1.5 trillion will seem like a minor fraction of the total gains. Will such a prediction uphold?
According to the Joint Committee on Taxation that works with Congress on a non-partisan basis, economic growth from this tax bill is going to be around $451 billion. Well, if you simply do the math then you will see that this still leaves $1.1 trillion net deficit that is not addressed.
What Happens to the Middle-Class Earners?
Tax cuts for various layers of the society differ greatly. For example, rich are expected to pay less and the corporate cuts are a prime example of that. On the flip side, low-income families will see more savings from the increased childcare credit and a greater standard deduction. Yet, what about the middle-class citizen?
Well, not much. In the words of Mr. Simmons, “pretty much all the advantages afforded by this bill for the lower class taxpayer, the middle-class taxpayer is exempt from anyway”. In addition, these provisions that target lower-income families are set to expire in 2027, which means that any benefits enjoyed will be short-lived.
The success of the bill is based on a chain of events.
If the new tax bill is to be successful, the Congress will have to enact additional bills to keep it this way. For example, the bill already takes away the Obamacare Individual Mandate, which could cause over 13 million Americans to lose their health insurance by 2027.
The number of those whose premiums would go up is even greater, and predictions indicate that we will have to pay as much as 10% more for our healthcare. Additionally, if the expected bills that accompany the new tax bill are not passed, more changes would have to come and address many areas of concern.
The impact on the trade deficit is hard to predict.
Currently, the United States has a large trade deficit. The new tax bill aims to repair that and create a more prosperous scenario where imports will not exceed exports. Unfortunately, such an outcome is almost impossible to predict as we cannot foresee how people will spend their savings.
The bottom-line of the tax cuts is to put more funds into average Americans’ pockets. Saying that this will happen, how do we conclude that this capital will be reinvested into domestically produced goods? If you have more money, you are free to purchase foreign goods so long as there is a supply of them.
Hence why it is almost impossible to say that the economy and exports would benefit. The final result could be opposite under multiple scenarios and that uncertainty is probably the biggest flaw of the new tax bill.