The public discussion of the Tax Cuts and Jobs Act is obsessed with a narrow view of short-term winners and losers. It is based on greed, envy, and coveting. Those negative human emotions are not solid ground upon which to make public policy. The discussion misses the long-term purpose of tax reform.
The U.S. economy has been barely on life support for the past eight years, with annual GDP growth averaging a mere 1.7 percent. This is less than one-half the historical long-term average. In fact, we have been told over and over again by our self-appointed "betters" that this is the new normal; that all we can expect is sluggish economic growth into the foreseeable future. Instead of doubling our standard of living every generation, we are told to accept that it will now take two generations.
But it is a self-evident truth, understood by the vast majority of normal Americans, that we the people spend our hard-earned money much more efficiently and productively than does government. With that truth in mind, and with the full understanding that any reform will be less than perfect, here is a rundown of the major provisions in the "Tax Cuts and Jobs Act".
1. Reduces individual income tax rates: The top rate falls from 39.6 percent to 37 percent; the 35 percent bracket is unchanged; the 33 percent bracket falls to 32 percent; the 28 percent bracket falls to 24 percent; the 25 percent bracket falls to 22 percent; the 15 percent bracket falls to 12 percent and the 10 percent bracket is unchanged.
2. Raises the standard deduction to $24,000 for married couples filing jointly (from $13,000 under current law); to $12,000 for single filers (from $6,500); and to $18,000 for heads of households (from $9,550).
3. Ends the individual mandate of the Affordable Care Act that provides tax penalties for individuals who do not obtain health insurance coverage.
4. Raises the child tax credit to $2,000 (from $1,650), and creates a $500 credit for nonchild dependents. The child credit can only be claimed if the taxpayer provides the child's legal Social Security number.
5. Reduces the corporate tax rate to 21 percent (now 35 percent), and repeals the corporate alternative minimum tax.
6. Allows full expensing of capital investments (now required to be depreciated over time).
7. Doubles the exemption for estate taxes (the "death tax). In 2018, an individual can exclude $11.2 million in assets from these taxes, and a couple can exclude $22.4 million. The exemption is indexed for inflation.
8. Repatriated U.S. business profits now held overseas are subject to a one-time mandatory tax of 8 percent on illiquid assets and 15.5 percent on cash and cash equivalents.
9. Creates a 20 percent deduction for pass-through income. Owners of pass-through businesses (sole proprietorships, partnerships, S-corporations, and LLCs) now pay taxes on through the personal tax code, meaning the top rate is 39.6 percent.
10. Limits the application of the mortgage interest deduction for married couples filing jointly to $750,000 worth of debt (now $1 million). Caps the deduction for state and local taxes at $10,000.
There are lots of other details in this tax reform, including sunset provisions, but I believe these are the most important. Note that it is impossible to reform such a massive tax code without some special interests or individuals ending up with a tax increase.
Yet, on balance and for the vast majority of Americans and of American businesses, this legislation provides significant tax relief - keeping more money in their pockets to spend and invest as they see fit. Not to mention the savings in time and money for tax preparation.
More importantly, in my view, is the fact that this tax bill provides a substantial increase in the incentives to work, produce, save, and invest. Those economic incentives lead to a stronger economy; one that creates more jobs and more income over time.
This long-term impact on capital formation and economic growth is even more important than the short-term impact of increased private spending.
Let us recall that the last major tax reform was under President Reagan more than 30 years ago. That reform led to steady-state economic growth averaging over 4 percent annually and the creation of millions upon millions of jobs.
Despite the naysayers on the left, who also disparaged Reagan's tax cuts, there can be no doubt that President Trump's tax reform will lead to a similar economic boom. Indeed, it is possible that the economic boom is underway, just based on the expectation that these incentives would be implemented.
Paul Prentice is an economics fellow at The Centennial Institute at Colorado Christian University.