This is part of our educational blog series, “The Short Form,” to simplify taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. issues and explore the world through the lens of tax policy. Learn more about taxes with TaxEDU.
Earlier this month, House Republicans released a major tax reform package that would temporarily cut taxes for businesses and individuals. The House GOP tax plan tries to encourage businesses to invest and give individuals and families some relief from inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. . It does both imperfectly, but some provisions are a step in the right direction.
What Does the Plan Do Well?
The package would restore deductions for businesses to recover the cost of their investments.
Why is this important? Generally, improving investment incentives helps boost the economy, create more jobs, and spur innovation.
Imagine a medical device company invests $1 million in developing new technology. Under the bill, they’d be able to deduct the entire $1 million from this year’s taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. , instead of spreading it out over multiple years and losing money due to inflation and the time value of money. This allows the company to make more investments, growing the business and leading to both better and cheaper products.
Additionally, the House GOP tax plan would improve accountability for Opportunity Zones—a program to incentivize investment in economically distressed areas—with better reporting standards.
What Does the Plan Do Poorly?
The primary problem with the bill: it’s temporary. Both the business and individual provisions expire in 2025, so it does not create a long-term benefit to the economy, wages, or jobs.
The bill tries to help individuals and families by increasing the standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. , but this isn’t the best way to provide targeted inflation relief. In fact, it creates little to no benefit for low-income households—groups that need relief the most—because many already have little to no taxable income.
The bill also retroactively changes business deductions, which decreases the money the government takes in without providing any economic benefits (because businesses can’t go back in time and invest more).
The plan is roughly revenue neutral—meaning the overall amount of money collected remains the same despite changes in how it’s collected. That’s both because its changes are temporary (not good), and because it cuts back on other spending (legitimate).
And regarding Opportunity Zones, the plan would expand them before the results of the new reporting requirements come in—meaning before we know whether they work or not.
How Would It Affect Me?
If you pay federal income taxes, you’d likely pay a little less, no matter what tax bracketA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. you’re in, and you could potentially find yourself in a lower tax bracket. Business owners would also be able to fully deduct their investment costs through 2025. But the benefits are modest and mainly go to middle- and upper-middle-class earners.
The changes would temporarily boost the economy, but it would return back to normal once the policies expire.
Would the Tax Cuts Pay for Themselves?
No.
When people say a tax cut pays for itself, they typically mean that the economic growth produced by the cut—including the jobs created and the taxes paid on the additional wages—results in enough additional revenue in the long run to offset initial losses. For the GOP tax package to pay for itself in those terms, it would have to raise enough money to offset the tax cuts through additional economic growth alone.
The tax cuts in the reform package do not pay for themselves, but they are paid for because they expire and because the package reduces spending elsewhere.
Why Does This Matter?
A big tax policy debate is coming. In 2025, many of the changes in Republicans’ 2017 tax law will expire, leading to a big tax increase on everyone unless Congress acts. This package shows House Republicans’ priorities.
While the House GOP tax plan trends in the right direction, it could be better. For example, lawmakers should permanently allow businesses to deduct the full cost of their investments, a policy with a high economic “bang for its buck.”
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