Before it can become law, the Senate plan will have to be reconciled with the House version, even though both remain deeply unpopular with voters. Only 16% of Americans have said they think the plan is actually going to cut their taxes, less than half the number of people polled who think that their bill is going to go up, according to a Nov. 15 poll from Quinnipiac University.
Yet it seems the Republican-led effort will be successful, despite concerns that many middle class people could actually see their taxes rise, that social programs could suffer, that small businesses could be harmed and that a hoped-for economic boom may never materialize.
Indeed, the Senate was undaunted by a late Friday afternoon score from the Tax Policy Center showing that the bill would generate negligible economic growth — even though that has been its key selling point.
Several of the final member holdouts, including Sens. Jeff Flake (R-AZ) and Susan Collins (R-ME), had announced by Friday afternoon that they would support the bill. Flake said he would back the effort after receiving assurances that the Senate would support a “growth-oriented legislative solution” to protect recipients of the Deferred Action for Childhood Arrivals program, known as DACA. Collins announced her support after receiving a concession on state and local property taxes.
Like the House version of the bill, the Senate’s version allows homeowners to continue deducting up to $10,000 in state and local property taxes. Other last-minute changes included a deal to extend a tax deduction aimed at so-called “pass through” entities, which helped win over Sens. Ron Johnson (R-WI) and James Lankford (R-OK). To help pay for the new tax cuts, the bill will also reportedly retain the “alternative minimum tax” — a measure created to prevent the wealthy from taking advantage of too many tax deductions, and which was originally on the chopping block — though the AMT would be modified to apply to fewer people. Similarly, the bill would also maintain the estate tax, but it would double the exemptions, which currently at $5.49 million for individuals and $10.98 million for married couples.
Ahead of the vote, critics said the bill did too much for wealthy Americans and corporations and too little for the working class.
“The right way to do tax reform would have been to have some moderate reduction in corporate tax rates for international competitiveness, but to offset that with other taxes that tend to hit the upper incomes,” said William Cline, a senior fellow at the Peterson Institute for International Economics and former Treasury official under President Richard Nixon. “And it seems to me it’s done the exact opposite.”
Confused? Here are five key ways the tax plan could affect you.
1. You actually might pay higher taxes
Though the latest version of the bill has not yet scrutinized by tax experts, previous estimates from analysts like the Tax Policy Center and the bi-partisan Joint Committee on Taxation have suggested many households might end up paying more, as opposed to less, in taxes. In the short term, that number would be relatively small — about 2.5 million households making less than $40,000 by the year 2019 according to the JCT — but more people would pay more over time as individual cuts expired. The most recent version’s JCT score wasn’t released until about 3:15 a.m. Eastern, about an hour after the bill itself had already passed.
By the year 2025, 22.5 million filers making less than $200,000 per year would see tax increases above $100, according to an analysis from the Center on Budget and Policy Priorities. And by the year 2027, many of the tax cuts aimed at individuals expire, at which point most American households would effectively pay more than they would under the current law.
But there’s another, less obvious way the bill introduces tax hikes as well. To offset lost revenue, the bill proposes using a slower index for inflation, which means that all filers — especially those whose tax relief is lower to begin with — receive smaller and smaller benefits over time as the slower inflation measure kicks in.
To be fair, the reason why the numbers get particularly dire after 2027 is that is when many of the bill’s individual cuts expire. There’s no reason why those cuts couldn’t be extended — but that would inflate the projected cost of the bill even more.
And crucially, many folks getting their taxes reduced might not have much to be excited about: By 2019, according to Joint Committee on Taxation data, nearly two in five households would either see a tax increase or a tax cut of less than $100, a point made by New York University’s Lily Batchelder.
2. Your small business could be at a disadvantage
Another problem for the bill? It’s drawing a surprising amount of criticism from traditional Republican constituencies like small-business owners, who account for about half of private sector employment in the country. A recent poll of 794 owners commissioned by the group Businesses for Responsible Tax Reform found that a narrow majority — 51% of them — opposed the current tax plan. Only 34% of the sampling approved of the bill, with more of the sampling identifying with the Republican Party.
The problem is that, while businesses of all sizes have been promised tax relief, larger companies are getting a comparatively bigger advantage.
“Small businesses want to be treated the same as big businesses, and neither of these bills do that,” said Frank Knapp, chair of Businesses for Responsible Tax Reform and CEO of the South Carolina Small Business Chamber of Commerce. “They’re going to reduce the income tax permanently for C corporations from 35% to 20%; that’s a 43% cut. That’s humongous. Then you look at what they offered to small businesses. ... It ain’t much.”
To address this, the Senate bill first proposed letting small-businesses owners claim a higher deduction on their “pass through” income — 20%, up from 17.4%. Then on Friday, they lawmakers sweetened the pot yet again, raising that deduction to 23%, according to reporting from Bloomberg.
Small-business owners like Knapp still say this system will be more complicated. “It’s a very convoluted, complex process in the Senate,” Knapp said. “We all got to have accountants, but we’ll have to pay them more money because they’ll need more time.”
Yet even some representatives of large corporations have shown discomfort with the content of the bill. John Bogel, founder of Vanguard, one of the largest mutual fund companies in the world, called the bill a “moral abomination” for rewarding corporations at the expense of working people, Bloomberg reported. “Corporate profits after taxes last year were the highest they’ve ever been in the history of GDP going back to 1929,” he said. “Individual wages are at the lowest level in about 15 years as a percent of GDP.”
He added: “So we are helping people who are doing very well and doing nothing for the people doing very badly.”
3. Basic social services could be imperiled by budget cuts
Another surprising opponent of the bill? Republican Governor of Ohio John Kasich, who sharply criticized the bill’s health care-related provisions: The bill tries to balance lost revenue in part by cutting health care spending and the individual mandate. The Congressional Budget Office estimated that, once you factor how repealing the individual mandate will discourage healthy people from buying insurance, “average premiums in the nongroup market would increase by about 10%” starting in 2019, compared to their projected rate.
The CBO estimates these provisions will result in 13 million fewer people receiving insurance by 2027 and likely premium hikes for everyone else. Vox estimates that the bill’s health provisions could lead to an increase of more than 15,000 preventable deaths per year. In a tweet, Vox’s Sarah Kliff argued that the Senate version could just as easily be called a health care bill because of its changes to spending — and Kliff pointed out that the tax bill is actually quite similar to the failed ACA repeal in that sense.
Because of its effect on the deficit, some opponents of the bill fear the tax bill is also a Trojan horse for entitlement cuts that have long been desired by budget hawks like House Speaker Paul Ryan.
And while cuts to Social Security and Medicare would primarily affect the elderly, low-income and ill, younger Americans would also likely have to contend with cut services as well — particularly to education.
Though the Senate bill, unlike the House bill, does not make tuition waivers taxable — a move that some education experts say would put most advanced degrees out of reach for anyone but the very wealthy — it institutes a partial repeal of local state and property tax deductions.
Those are typically the taxes that help fund schools: Some policy analysts believe public education cuts would become more prevalent since it will become much harder for local governments to raise those taxes when education budgets become strained.
4. You might not want to hold your breath on job growth
Many CEOs have addressed what they want to do with their tax cut on earnings calls — a requirement for publicly traded companies is to share information about performance and answer questions for shareholders — and few indicated they planned to do much hiring.
In a question-and-answer session at the Wall Street Journal’s CEO Council Conference, so few CEOs raised their hands when asked if they would increase capital investment that Director of the National Economic Council Gary Cohn had to scold the crowd. “Why aren’t the other hands up?” he asked.
Instead, many of the CEOs — including executives from Coke, Pfizer and Cisco — said they planned to use tax savings primarily to buy back shares of company stock, according to a Bloomberg report. These so-called “share buybacks” return cash to shareholders but don’t do anything to stimulate hiring or new jobs.
Barely half of Americans own any stock at all, with stock ownership heavily concentrated among wealthier households. And though stock ownership has declined across all income groups since the Great Recession, the declines have been steepest in the middle class, according to Gallup.
Democrats tried to call attention to some of these problems by proposing an amendment that would have required companies receiving tax cuts to raise wages at the same rate that they raised executive pay and stock buybacks which the GOP overwhelmingly rejected, as Sen. Dianne Feinstein (D-CA) noted on Twitter.
5. Your children and grandchildren could pay for the tax bill
A final problem with the bill? Concerns over the deficit, which under the Senate version of the bill would increase by more than $1 trillion within the first 10 years. The larger the deficit, the more of the money the U.S. needs to spend on interest payments, creating a lag on growth.
“You’ve got a dichotomy that GOP has never faced,” said Rebecca Walser, a tax attorney and certified financial planner. “They’re supposed to stimulate the economy with pro-growth pro-business policies, but ... at the same time we’re also the fiscal conservatives.”
The last time the GOP passed tax reform, Walser explained, there wasn’t much of a national debt. Now, the GOP is placed between a rock and a hard place, with desired stimulative policies on one hand and the desire for balanced budgets on the other. The GOP allowed themselves a $1.5 trillion spike to the deficit, explained Peterson’s Cline, because that’s how much revenue the GOP expects the economy to generate in new growth.
“At least Reagan’s tax cuts in 1981 were well-timed,” said Jeffrey Frankel, a professor at the Harvard Kennedy School of Government and a member of Ronald Reagan’s Council of Economic Advisers. “This time around the timing is much worse. Unemployment is 4.1%. The economy is strong. We don’t need it... We can’t enter the retirement age of the baby boomer generation with all this debt. We ought to be paying down the debt and preparing for that as opposed to jacking it up.”
In a recent Financial Times story, economists Lawrence Summers and Jason Furman identified a number of problems with the economic scholarship that lawmakers have used to justify assumptions about the tax cut’s effect on growth and wages.
“What was your reason for citing only the upper end of the range of Treasury’s estimates, from one model and ignoring its other calculations?” they write. “Do these differences affect the validity of your use of this plan as a model for the current congressional bills?”
The message, in short, is that if projections for economic growth that have been used to justify the tax bill are based on cherry-picked data, that could spell very bad news for the middle class.
Sign up for the Payoff — your weekly crash course on how to live your best financial life.
Dec. 4, 2017, 10 a.m.: This story has been updated.
Correction: Dec. 4, 2017