Tax Cuts and Jobs Act (H.R. 1): Conference Agreement

Tax Cuts and Jobs Act (H.R. 1): Conference Agreement

December 19, 2017
Tax Cuts and Jobs Act (H.R. 1): Conference Agreement
The Tax Cut and Jobs Act (H.R. 1) was released by the
Some items currently excluded from income would be
conference committee on December 15, 2017. The bill
included—for example, the employer-provided exclusion
contains some elements of the House tax reform blueprint,
for moving expenses.
the “Better Way,” released in 2016.
The bill also uses the chained Consumer Price Index (CPI)
Individual Tax Revisions
measure of inflation to index rate brackets and other
The bill would replace the current seven rate brackets (10%,
parameters such as the standard deduction. Although many
15%, 25%, 28%, 33%, 35%, and 39.6%) with tax rates of
economists believe that this measure is a better measure of
10%, 12%, 22%, 24%, 32%, 35%, and 37%. The rate
inflation, using it would have the effect of raising taxes
brackets indicate that the 10% rate will apply to about the
compared with using the regular CPI.
same amount of taxable income as in current law and that
the income currently taxed at 15% would be taxed at 12%.
The bill would reduce penalties for not purchasing health
The current top rate of 39.6% applies to taxable income
insurance to zero.
above $470,700, but the 37% rate in the bill would not
apply until $600,000 of taxable income for joint returns of
In general, the individual tax revisions would expire after
married couples ($500,000 for other returns).
2025, except for the change in inflation indexing and the
reduction in penalties for not having health insurance.
The bill would alter some of the elements related to family
size and structure by eliminating personal exemptions and
Tax Provisions Affecting Businesses
allowing a larger standard deduction, $24,000 for joint
The bill would reduce the corporate tax rate from 35% to
returns and $12,000 for singles for 2018, adjusted for
21% and allow a 20% deduction for businesses that are
inflation for the following years. The current personal
taxed under the individual income tax as pass-throughs,
exemption is $4,050 per person for 2017, and the current
including proprietorships, partnerships, or Subchapter S
standard deductions are $12,700 for joint returns and
corporations (corporations with a small number of
$6,350 for single returns, all indexed.
shareholders that elect to be taxed at individual rates). The
deduction applies to business income and sunsets after
The bill would increase the current child credit of $1,000 by
2025. The deduction does not apply to specified service
$1,000 with up to $1,400 refundable (against up to 15% of
businesses (such as health or law) except for those under a
income over $2,500). The $1,400 limit, but not other
taxable income ceiling. The deduction is limited to the
elements, would be indexed for inflation. A nonrefundable
greater of 50% of wages paid or the sum of 25% of wages
credit of $500 for non-child dependents would be allowed.
paid plus 2.5% of the basis of tangible assets. The service
The credits would be phased out at higher income levels of
business exclusion and the limits based on wages and assets
$400,000 for joint filers ($200,000 for others). Exemptions
would apply only after taxable income reached $315,000
for the alternative minimum tax would be increased by 40%
for a joint return and $157,500 for others with these
(for example, from $78,750 to $109,400 for joint returns),
amounts phased out (completely at $415,000 and $207,500,
and indexed.
respectively). Business losses that can be passed through
are limited to $500,000 for joint returns and $250,000 for
For the individual income tax, the bill would broaden the
others, indexed for inflation.
base by disallowing itemized deductions except for
mortgage interest (limited to interest on mortgages of
Under current law, up to $500,000 in equipment can be
$750,000 and with no deduction for interest on home equity
expensed, phased out after $2 million in spending. The bill
loans); state and local income, property, and sales taxes (up
would increase the limit to $1 million with a phase-out after
to $10,000); charitable contributions deductions; and
$2.5 million. The bill allows all equipment to be expensed
medical expense deductions (lowering the floor from 10%
through 2022 (public utility property would be excluded),
to 7.5% of income for 2017 and 2018). The deductions for
with a phase-out of the share expensed over the next four
other state and local taxes, casualty losses (except for
years (80%, 60%, 40%, and 20%). Deductions for excess
certain disasters), and other minor provisions would be
interest for corporations would be more limited than in
eliminated. The moving expense deduction (an above-the-
present law. Research and experimentation costs would be
line deduction) would be eliminated (other than for
depreciated over five years rather than expensed, after
members of the armed forces).
2021.
The current earned income credit and tax rates on capital
The bill would repeal the Section 199 production activity
gains and dividends are not changed.
deduction. It would disallow carrybacks of net operating
loss deductions, allow unlimited carryforwards, and limit
the deduction to 80% of taxable income. It would limit or
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Tax Cuts and Jobs Act (H.R. 1): Conference Agreement
repeal a variety of other deductions and credits (e.g., the
Revenue, Economic, Distributional, and
orphan drug credit, credits for rehabilitation, and deductions
Administrative Issues
for meals and entertainment and transportation fringe
The Joint Committee on Taxation (JCT) has estimated a 10-
benefits, and FDIC payments). It would retain the research
year revenue loss from FY2018 to FY2027 of $1.456
credit and the low-income housing credit and allow like-
trillion from the bill, with a gain in 2027.
kind exchanges for real estate but not for other property. It
would restrict a number of provisions for insurance
The bill would appear to reduce some distortions in the
companies.
current system, such as that between debt and equity, and
across different asset types. A macroeconomic analysis of
The corporate alternative minimum tax would be repealed.
the House and Senate bills showed an offset of about a third
of the revenue loss from average economic growth of
International Business Tax Provisions
0.07% to 0.08% per year.
Under current law, worldwide income of U.S.
multinationals is taxed, but the tax on earnings of foreign
A territorial tax would tend to increase profit shifting,
subsidiaries is delayed until the income is repatriated (paid
although the base erosion provisions aimed at reducing it
as dividends to the U.S. parent). Firms may take a credit
could offset that effect to some extent. The act would
against U.S. tax for taxes paid to foreign jurisdictions,
eliminate the disincentive to repatriate foreign source
although these credits are limited to U.S. tax due. Credits
income. The effects on capital inflows from abroad are
from high-tax jurisdictions can be used to offset U.S. tax on
uncertain in direction, because lower rates and expensing
income from low-tax jurisdictions (cross-crediting). U.S.
reduce the tax on equity capital but also reduce the subsidy
firms have accumulated a large amount of untaxed earnings
for debt, an effect that would be increased if some interest
abroad, including a significant share held in cash and cash-
deductions are disallowed.
like assets.
The JCT has provided estimates of effective tax rates by
The bill moves toward a territorial tax (with dividends
income before and after the tax change for the conference
deducted). The bill also has a deemed repatriation of
agreement. Converting these estimates to percentage
existing accumulated income subject to tax of 15.5% for
changes in income after tax for 2019, the overall increase in
cash and cash equivalents and 8.0% for earnings invested in
after-tax income is 2.1%. For incomes under $40,000, it
illiquid form. (A tax of 35% is imposed retroactively if a
ranges from 0.5% to 1.0%. For incomes of $40,000 to
firm inverts within 10 years.) A territorial tax encourages
$50,000, it is 1.1%. For incomes of $50,000 to $200,000, it
more profit-shifting (artificially moving profits abroad), and
is 1.5% to 1.9%. For incomes from $200,000 to $500,000, it
the bill would tax, on a current basis, global intangible low
is 3.4%. For incomes of $500,000 to $1 million, it is 4.5%.
taxed income (GILTI) in excess of 10% of tangible assets at
For incomes over $1 million, it is 3.4%.
a 10.5% rate. Foreign derived intangible income earned in
the United States would be taxed at 13.125%. The bill
For 2027, the JCT estimates no overall increase in after-tax
would not include a provision limiting the share of global
income. For incomes under $50,000, it ranges from -0.4%
interest deducted by firms with foreign affiliates to 110% of
to -1.5% (higher taxes and lower incomes). For incomes
their share of assets or income as proposed in the original
from $50,000 to $200,000, it ranges from -0.1% to 0.1%.
House and Senate bills. A 10% alternative tax, increased to
For incomes from $200,000 to $500,000, it increases by
12.5% after 2025, is imposed on the sum of deductible
0.3%; for incomes from $500,000 to $1 million, 0.4%; and
payments to related foreign parties by U.S. firms (base
for incomes over $1 million, 0.6%. The smaller benefits or
erosion payments and taxable income) and is paid if higher
increased taxes over time reflect, in part, the inflation
than regular tax before most credits.
adjustment, as well as the sunset of individual tax changes.
The foreign tax credit would be largely eliminated but
Equity and fairness concerns might also be raised about the
would be retained for income subject to taxation, including
elimination of itemized deductions for casualty losses and
branch income and income taxed under anti-abuse rules,
employment and investment expenses that can result in an
although a separate limit on the foreign tax credit would be
overstatement of income for affected taxpayers. Equity
applied to branch income and to GILTI (so that cross-
issues might also be raised about allowing state and local
crediting—that is, using excess credits from one type of
income tax deductions for corporations but not fully for
income to offset U.S. tax due on another type—could not
individuals. Some parts of the act would simplify the tax
occur).
code. The share of taxpayers (currently about a third) that
itemize will likely be reduced significantly due to the
The Estate and Gift Tax
restrictions on itemized deductions and the increase in the
The current estate tax exemption of $5.49 million (which is
standard deduction. The deduction for capital income of
adjusted for inflation) would be doubled, with the increase
pass-throughs may lead to complications as individuals try
expiring after 2025.
to recharacterize income to be eligible for the deduction.
Jane G. Gravelle, Senior Specialist in Economic Policy
IF10792

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Tax Cuts and Jobs Act (H.R. 1): Conference Agreement

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https://crsreports.congress.gov | IF10792 · VERSION 2 · NEW