In Parts 1-8 of this series, I comprehensively (except for a few one time private bill-like provisions or non-tax provisions) reviewed the domestic provision of H.R. 1, the new tax bill, effective December 22, 2017, in the frame of economic policy. Here, I recap some highlights of that analysis.
* The bill massively cuts tax revenues at a time when we need smaller deficits and more government investment in the economy.
* The bill exacerbates economic inequality at a time when it is already dangerous high by disproportionately favoring the very affluent and public held corporations.
* The net revenue impacts from individual non-business provisions arise almost entirely from changes in tax rates.
* A trade of the personal exemptions for a larger standard deduction and larger tax credits for dependents hurts families with kids in college or age 17+, and combined with other provisions greatly reduces the number of itemizers.
* A $10,000 annual cap on the itemized deduction for state and local income taxes and property taxes is a serious blow to people in states that rely heavily on these taxes mostly in the Northeast and Pacific states.
* The reduction in home mortgage interest limits in new loans slightly damps high cost housing affordability, and the bill ends deductible interest for home equity loans (something probably prone to work arounds).
* The end of the personal casualty loss itemized deduction (except for national disasters) is singularly cruel to a small number of intensely impacted people.
* The elimination of the deduction for moving expenses (even if employer paid) outside military personnel generates little revenue and is bad for the economy.
* The end of the alimony deduction starting for obligations created in 2019 is bad policy. The better decision would have been to treat child support as deductible as well.
* The end of miscellaneous itemized deductions has serious negative consequences in some circumstances. The main deductions eliminated include expenses for the production or collection of income (including attorneys fees for non-business lawsuits such as personal injury lawsuits), unreimbursed expenses attributable to the trade or business of being an employee, repayments of income received under a claim of right (only subject to the two percent floor if less than $3,000); repayments of Social Security benefits; and the share of deductible investment expenses from pass-through entities. Existing law was a good compromise.
* Eliminating the individual AMT in favor of addressing potentially abusive deductions individually is certainly a major blow for tax simplification.
* Doubling the estate tax exclusion from $5,000,000 plus inflation adjustments to $10,000,000 plus inflation adjustments, per person, per lifetime, is bad policy.
* Eliminating the ACA Individual Mandate penalty is bad policy.
* A two year dramatic reduction in alcohol excise taxes is an interesting economics experiment.
* Provisions tightening limits on the taxation of excess benefit from non-profits and narrowing the availability of tax free municipal bonds are good housekeeping measures by and large.
* The excise tax on a handful of large private college endowments isn't economically important but symbolically sends a big message.
* House keeping tweaks to insurance company taxation aren't bad.
* Limitations on the net operating loss deduction are sensible and open the door to further sensible limitations. (This is a $350.8 billion over ten years provision.)
* The limitation on the interest expense deductions of large businesses ($25 million gross receipts or more for each of the last three years) net of interest income, excluding real estate businesses, regulated utilities, and car dealerships, is a complex law with no clear policy justification that hurts mostly pro-Trump interests like energy and mining companies and health care companies and heavy manufacturing companies. (This is a $253.4 billion over ten year provision.)
* The lengthening of the time period for R&D expense amortization probably reduces an important abuse. But, moderate enhancements of depreciation deductions and expensing probably encourage some capital investment, but these are small impact changes where the farm has already been given away. The net effect of the depreciation, expensing and amortization rule changes is a mere $150 million a year in reduced tax revenues, but the net effect is more economically beneficial. These changed do likely result in more job losses due to automation that wouldn't make economic sense in the absence of these changes.
* Allowing cash basis accounting for small C corporations is probably necessary in light of the changes in the corporate tax rate making C corporations much more attractive. This is more than paid for by tightening up rules on when income must be recognized and by ending 1031 exchange treatment for property other than investment real estate (e.g. ending 1031 exchanges for tangible personal property such as business equipment and livestock) is good policy, but doesn't go far enough.
* The cut of corporate tax rates from graduated rates up to 35% to a flat 21% is bad policy and very expensive. (This is a -1,388.8 billion over ten years provision.)
* The 20% deduction for most self-employment income (except investment income narrowly defined to exclude rent, service company income for the very affluent, and self-employment income of the very affluent that involves neither capital assets nor W-2 employees) is horrible policy and expensive. (This is a -414.4 billion over ten years provision.)
* The demise of the domestic production activity deduction is a good thing.
* The carried interest reform provision is impotent and doesn't solve the real problem, and tweaks of caps on top executive compensation and equity compensation rules are likewise half-measures.
* Fringe benefit reform ends the entertainment expense deduction and a variety of "club dues" type benefits and company car benefits. But the tweaks to the employee achievement award rules are petty and a pain.
* The elimination of the deduction for FDIC premiums of big banks is pure political payback.
* The elimination of deductions for a variety of fines and for sexual harassment/assault claim expenses involving non-disclosure agreements is a notable policy change.
* The tax break for private aircraft management is political stupidity with for a break of less than $5 million a year.
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