GOP tax bill is full of uncertainty: Who are real winners and losers?

GOP tax bill is full of uncertainty: Who are real winners and losers?
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Republicans in the U.S. House of Representatives have unveiled their tax reform bill, claiming that it will aid economic growth. A recent Politico Morning Consult poll shows that the plan has garnered mixed support, mostly from small businesses, which are set to benefit from the proposed corporate tax rate reduction, and from parents, who are set to benefit from increasing the child tax credit.

But it remains unclear who will actually qualify for or benefit from the bill’s effects. It is really just about Washington once again deciding who does and does not have to pay taxes. It is not the free market. The tax reform plan is an attempt to engineer the economy, and it gives politicians the power to pick and choose who wins and who loses. Generally, the little guy loses and the big guy ends up winning.

One of the main tenets of the tax reform plan is the reduction of large corporation tax rates. Under the plan, the top corporate tax rate will be cut from 35 percent to 20 percent. Additional tax breaks will be available to big businesses, as they will be able to deduct every cost related to the purchasing of new equipment, plus enjoy a low 12 percent tax rate on money brought back to the United States from overseas.

Pass-through companies, which are businesses that operate as sole proprietorships, partnerships or limited liability companies, would also benefit from the tax reform plan. Their tax rate would be reduced from 39.6 percent to somewhere in the range of 25 percent to 30 percent. Plenty of small businesses will be affected negatively by the bill, which states that small business owners will shell out 30 percent of their income at the 25 percent rate. The rest will be covered by the business owner’s individual tax rate.

The highest earners would receive some added tax breaks from the move, as the estate tax would be eliminated by 2024. The estate tax currently only affects those with estates worth more than $5.49 million. Charitable deductions would also allow people in the highest tax brackets to lower their tax obligations, as they will no longer have to pay the alternative minimum tax.

The alternative minimum tax currently requires taxpayers earning more than $130,000 to calculate their tax obligations under both the regular process with as many deductions as possible and under the alternative minimum tax. If you are part of this bracket, you must pay the higher of the two tax calculations. This obligation would be completely eliminated under the plan.

Naturally, Democrats have expressed their opposition to the tax reform plan, which would eliminate most of the state and local tax deduction, increasing the tax burden for high tax blue states. More than a third of filers in states such as California and New York benefit from the state and local tax deduction. The plan would still give these filers the chance to deduct up to $10,000 on property taxes paid locally, but deductions on other state or local taxes would not be eligible for federal tax deductions.

The GOP has slowly become the party of the working class, a demographic that used to belong to Democrats. However, the bottom 35 percent of Americans will not get any extra benefits under the bill. Their federal tax liability is $0, and it would remain so in the plan. However, some believe that a fairer tax system would yield more credit in return to lower income homes.

One of the main criticisms surrounding the bill is how it will hit homeowners. If you own property and have mortgage obligations, you are currently only allowed to deduct interests on the first $1 million in home loans. The tax reform plan will cut this amount to the first $500,000. This might foment a mini meltdown amongst real estate agents, but it won’t be much of an overall hit to the value of higher end homes. The National Council of Nonprofits is also not too pleased with the bill, which will likely lower charitable deductions. Due to the increase in the standard deduction under the tax reform plan, less people are likely to itemize, and are thus less likely to give to charity.

In order to pass the Republican tax plan, supporters of the bill are seeking budget reconciliation, which is a congressional loophole that allows Congress to pass the bill with a simple majority of 51 votes. Nevertheless, a consensus has yet to be reached regarding certain key policy points, such as the large cut to the corporate tax rate, expanding the standard deduction and reducing individual tax rates from seven tax brackets to three. Many moderate Republicans are not on board with the entirety of the tax reform plan.

In essence, the plan is still the barebones structure of a skyscraper still being erected. All of the parameters of the bill largely remain unknown. However, like the Wall Street Journal, we lament that it is dissimilar to President Reagan’s 1986 tax reform, which simplified the income tax and also eliminated tax loopholes. The tax reform plan in its current incarnation ultimately has plenty of holes that paint an image of uncertainty for the future and obfuscates who the real winners and losers will be.

Chris Markowski (@ChrisMarko) is an author, investment banker, stock market analyst and consumer advocate. He is the personality behind Watchdog on Wall Street and the founder of Markowski Investments.