Analysis

It had appeared the tax reform might fail; some Republican senators were concerned about the bill's impact on the US national debt and deficits, and whether the legislation really would provide tax relief for middle-class workers (see UNITED STATES: 2018 Democratic resurgence may be afoot - December 13, 2017).

Yet this was overcome, and 51 senators voted in favour. In the House, 227 voted in favour and 203 against. However, the bill will go back to the House for a final vote: it was found that three procedural rules were broken and so minor changes to wording were made. This is unlikely to be problematic and Trump is likely to sign the legislation into law by the end of this year.

Businesses and citizens

The new legislation lowers tax rates for most citizens, but some will see their rate increase. Immediate tax relief for most will be felt in their pay cheques beginning in 2018, an election year where the entire House and one-third of the Senate is up for the vote.

Yet part of the tax bill's controversy is over who it will benefit. During his election campaign, Trump promised tax relief to middle-income and poor citizens and said the wealthy would have to pay their fair share.

However, the tax reform is likely to benefit wealthier citizens the most and provide only modest, and temporary, relief to middle- and lower-income workers. Most of the individual tax rate cuts expire in 2025, corporations will see their 35.0% tax rate lowered to 21.0% and the top individual tax rate of 39.7% will reduce to 37.0% (see INT: Reducing evasion is key as business taxes plummet - January 5, 2017).

Nonetheless, how higher earners fare depends on whether they are single or joint tax return filers and whether they have children. Due mainly to the loss of a portion of the state and local tax deduction for income taxes and because the bill preserves the Alternative Minimum Tax, in many states some high-income single filers will fare worse under the new legislation after a few years.

Opponents object to what they perceive as deceptions in the legislation. Take-home pay will go up with the lowered tax brackets throughout 2018. Yet when citizens file their tax forms after the elections in 2019 (when they will file under the new legislation's provisions), they will lose some deductions that may raise tax liability overall for some.

Housing

For example, the legislation caps the amounts citizens may deduct in state and property taxes at 10,000 dollars. For citizens in higher tax states with typically higher home prices (often the heavily Democratic-supporting states), that will be a major loss of federal income tax benefit.

Also, there will be a cap on the home mortgage deduction, with homeowners able to deduct interest on loans up to 750,000 dollars. That will likely put downward pressure on prices in expensive housing markets.

Current law gives an incentive to homebuyers to purchase more expensive homes financed by debt that provides a large tax benefit (and can drive people out of housing markets as prices rise). Now, however, realtors, home builders and businesses selling home products potentially stand to lose under the new legislation as it could decrease the incentive to buy more expensive homes.

Costs of care

Republicans in the House and Senate committees that wrote the final tax bill say a family of four with the median family income of 73,000 dollars will get a tax cut of 2,059 dollars, at least through to the end of 2025. Yet this depends on where workers live, as the result also depends on the highly differential state and local tax rates throughout the country and how that affects deductions on federal taxes.

However, the legislation will benefit taxpayers who claim the child tax credit, which is doubled. This will help middle-income workers with families, and is a real boost when coupled with the much larger standard deduction.

The child tax credit is available for all income earners. However, citizens at the very lower end of the income spectrum will not benefit if their federal income tax is zero after taking other benefits, since the child tax credit is not refundable.

The bill initially eliminated the deduction for medical expenses that exceed 7.5% of a person's annual income, but that was revised to become more than 10.0% of annual income. That provision will affect citizens with large medical expenses that do not meet the 10.0% threshold.

Employment effects

The tax reforms are intended to increase employment. However, there are claims that job growth from the bill will be more modest than Trump and Republican Congress members forecast.

This is because unemployment is already low and the individual tax breaks expire after 2025. That will eliminate much of the presumed economic growth achieved from lower taxes.

Political winners and losers

The new legislation will create winners and losers, and could set the scene for a political showdown in the 2018 midterm elections:

Democratic party

The tax reform is unpopular according to public opinion polling; many citizens agree with the Democrats' line that the legislation favours the wealthy. Unless the Republicans can overturn this view, the new legislation will provide a political opening for the Democrats to seize in the 2018 midterm elections.

Trump

Trump can now finish his first year in office with a major legislative victory (which will reduce taxes by over 1.4 trillion dollars over ten years). This gives him and the Republicans additional momentum to seek other major legislative enactments going into next year's midterms.

Congressional Republicans

The tax reform will remain squarely in the public consciousness. This may advantage Congressional Republicans who want to take advantage of the tax reform and robust US economic growth in debates in 2018 (see PROSPECTS 2018: US economy - November 28, 2017). Doing so could also reduce the focus on the controversial aspects of Trump's presidency. The calculation is that although the tax bill is unpopular now, the debate itself can be won next year.