What Does the Proposed Tax Reform Mean for You?


The short answer…it depends. It depends on such things as where you live, how much income you make, home ownership, business type, student loans, etc. Although this is a proposed bill and the final bill (if we get that far – and based off previous track record – it looks uncertain) will most likely look something very different from the proposal, we take a closer look below at who could benefit and who be hurt the most.

Who Benefits most?

Individuals who anticipate benefiting the most are the owners of Subchapter S Corporations (or S-Corps for short) and other pass-through entities (Partnerships and Sole Proprietors). The reason for the large benefit would come from the lowering of the corporate tax rate. Currently, pass-through entities are taxed at the individual’s personal tax rate, as high as 39.6%. If the plan goes through as proposed, the pass-through entities would be included in a proposed corporate tax rate of 25%. That’s obviously a significant cut on your tax liability.

Who Gets Hurt Most?

The proposed bill shows a consolidation of tax brackets from seven to three (possibly four based on some ambiguous language). Although the proposal didn’t share where the income levels would fall for the proposed three brackets, it is safe to assume that certain taxpayers are going to be paying a larger tax bill when the three brackets are revealed. There is a strong likely hood that taxpayers currently paying at the 28% and 33% marginal rates, could easily be bumped into the 35% proposed rate depending on where they set the income levels.

Also, even as this reform bill is being marketed as a tax break for “Middle-Income Americans,” based off a study by the Tax Policy Center, only 1.1% of the overall tax cut would go to the lowest-earning 20% of the population, while 74.5% of the tax cut would go to the highest-earning 20%.  Although there are a few changes that are clearly an effort to help the lower-income taxpayers (i.e. increased Standard Deduction and increased Child Tax Credit), the vast majority of the changes would appear to benefit the high-income earners (i.e. lower highest tax bracket, elimination of Alternative Minimum Tax, elimination of estate tax, and lowering max corporate tax rate).

Will it Pass?

I would say it was a fool’s errand to predict whether this bill will pass as is. It’s almost certain changes are going to take place in order to get everyone within the Republican party to agree. Since the Republicans don't have the 60 seats needed to defeat a Democratic filibuster, the party must use a fast-track process called Reconciliation, which requires 50 votes plus Vice President Pence's tie-breaker to push the proposal through. To use reconciliation, the Republicans must pass a fiscal 2018 budget authorizing its use. Republicans must also comply with the 1985 Byrd Rule, which limits the budget effects fast-tracked bills can have over a 10-year period, as assessed by the Congressional Budget Office (CBO). So basically, the Republicans' tax reform must either pay for itself, or Congress must pass a budget allowing it to pass bills using reconciliation that raise the deficit. The chance that this bill pays for itself is almost 0% based on the huge cut it takes from the revenue side. Combine that with the Freedom Caucus’s aversion to raising the deficit, and most experts are calling this bill Dead-on-Arrival. I guess we’ll just have to wait and see.

Kyle McCann