Essay Sample on Analyzing the Tax Cuts and Jobs Act of 2017: Advantages and Disadvantages for the Economy

Introduction

Historically, taxation has been the primary and fundamental concern for both the citizens and the federal authorities. Taxes are the primary source of income for both the federal, state and local income revenues. The two major categories are what the federal government collects and those that the state and local governments receive (Lee, Johnson, & Joyce, 2013). There are different types of taxes, but the payroll tax is the second abundant source of federal revenue after federal tax. The Tax Cuts and Jobs Act of 2017 (TCJA) was signed into law. The Act has made significant changes in building both small reductions to income tax rates for individuals and corporations. The Act has also made significant changes to increase individual alternative minimum tax (AMT) and estate tax exemptions. The research paper thus aims to review the pros and cons of the Tax Cuts and Jobs Act of 2017.

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Issue

The Tax Cuts and Jobs Act of 2017 (TCJA) has extensively focused on amending the 1986 Internal Revenue Code. Some of the significant changes introduced in the latter Act included reducing individual and corporation taxes, increase family tax credits and standard deduction, eliminate personal exemptions, limit deductions for state and local income, as well as property taxes. The Act also made it less beneficial to both individuals and corporations to itemize deductions, canceled some of the penalties which enforce an individual's mandate of the Affordable Care Act, among others. It was believed that by implementing the Act into law, the country would have more investors, increase job opportunities, and increase the overall income and household standards. The bill would also promote higher wages, increase employment rates, and other untold chances through a more dynamic and broader economy (Michel, 2017).

The new law has reduced the corporate tax rate from the previous 35% to 21% (Floyd, 2020). This corporate tax reform is a reduction from the previous 35% corporate tax rate. This substantial decrease in corporate tax will allow more firms to expand to fully expense investments in the nonconstructive capital (WhiteHouse, 2017). These changes have redesigned international tax principles and pass-through income reductions (Gale, Krupkin, Mazur, & Toder, 2018). Under the Income Tax Rules, the law has retained most of the old structure but has lowered the rates of the income tax brackets. Other key areas that have been directly impacted by the law include the single filers, married couples filing either jointly or separately, and withholding tax brackets, which reflect personal income tax schedules (Floyd, 2020). Personal Exemption and Healthcare Mandate is suspending exemptions, including the Affordable Care Act (ACA), that offered tax penalties to the person without insurance coverage.

Advantages

The Act has believed to bring numerous changes to individual and business income taxes, including but not limited to reforms that itemize deductions and other alternative minimum taxes. The policy has also expended standard deduction, lowered marginal tax rates across the brackets, as well as child tax credits (York, 2018). It has been estimated that the changes will simplify individual income taxes by removing the need to itemize deductions of millions of households. Nonetheless, most of the personal changes focusing on personal income tax codes will revert to the pre-TCJA status, after 2025.

This move, according to Congress Budget Office, has significantly reduced the federal deficit by an estimated $338 billion. Family Credits and deductions will also be temporarily affected by raising the child tax credits to $2,000 with a possible reduction of $1400 refundable. When more funds are spent than received in taxes, it runs a budget deficit (Lee, Johnson, & Joyce, 2013). When the spending is lower than collected taxes, it runs a budget surplus, while when expenditure and income are equal, the government is said to have a balanced budget (Lee, Johnson, & Joyce, 2013). Many properties are completely tax-exempt in the United States. Federal and state land is ordinarily exempt from local property taxes, for example, although these jurisdictions may make payments in place of taxation.

Federal Deficits and the National Debt are critical in the spending side of budgeting. The Tax Cuts and Jobs Act is predicted to have a significant effect on both the federal deficits and National Debts. For instance, the marginal tax rate reductions on labor investments will result in the long-run increase of the national GDP by 1.7%. However, it is predicted that the substantial tax cuts will result in lower national income and savings, higher interest payments once some of the policy laws are lifted, which will result in substantial tax hikes and spending cuts. The national government will have increased federal deficit and reduced national debt. The resulting deficits will add $1 to $2 trillion to the federal debt, according to official estimates. The debt increase will be more significant if some of TCJA's temporary tax cuts are extended. The report further predicts drastic increase on the amount of debt held by the public, reaching 106 percent of GDP by 2039 It is also estimated that the Act will result in the broader economy, reduce the unemployment rate, increase higher wages by about 1.5%, and creating 339,000 full-time positions (Tax Foundation, 2017). Expansionary monetary policy increases the level of aggregate demand in a variety of ways. The U.S. economy is so interdependent with those of other nations that no significant actions that the United States takes lack repercussions around the world (Lee, Johnson, & Joyce, 2013, p. 57). For example, increase consumption through disposable income on payroll taxes, investment from after-taxes, government purchases by raising grants. This will be mainly influenced by reduced corporate income taxes. Itemized deductions such as mortgage interest and the state and local tax paid deducts have been further reduced, thus broadening the base and reduced tax distortions. The average time to complete filling individual tax returns is estimated to decrease by 4-7%.

Disadvantages

Despite the definite future promises made by the law, a critical barrier to the economy has also been reported. For instance, under the Personal Exemption and Healthcare Mandate has suspended exemptions, including the Affordable Care Act (ACA) that offered tax penalties to the person who did not have health insurance coverage. It is estimated that over 13 million more people will be left without any form of medical insurance cover, hence will result in increased premium cover by up to 10% (Floyd, 2020). Supporters of the policy argue that only those households whose incomes are less than $250,000 per year should continue to enjoy these tax cuts (Lee, Johnson, & Joyce, 2013, p. 133). This action will hence increase tax for the upper-income taxpayers and an income tax system where a higher proportion of taxes are paid by these wealthier taxpayers. Under the benefit principle, it will result in an unfair distribution of the tax benefits between the higher households and the lower households (Lee, Johnson, & Joyce, 2013, p. 134). If the changes revert to the old TCJA structure, the outcome will be irreversible. These reforms will, however, depend on whether Congress will approve the changes to take effect after the period, which will likely result in most households experiencing increased taxes in 2026 (Kaeding, Pomerleau, & Muresianu, 2018).

Lastly, the policy has also received numerous criticisms from the media, economists, and think tanks that the law has been founded on forecasts of adverse impacts. For example, after reverts in 2026, the government and individuals are likely to experience more significant income inequalities, high trade deficits, lower health coverage, high budget deficit, increased healthcare cost, and disproportionalities on specific states and workgroups. It has been argued that the forms will only favor individual in top-paying professions, and low force income earns taxpayers to dig deeper into their pockets (Kaeding, Pomerleau, & Muresianu, 2018)

Conclusion

In conclusion, it is already clear that the federal government role in the economy involve interconnected functions. First, is to provide the legal framework for economic transactions. Second is to directly revenue for its economic operations, and most significantly set policies to guide its operations (Lee, Johnson, & Joyce, 2013, p. 55). The Tax Cuts and Jobs Act of 2017 have made the most substantial overhaul of tax code since the Internal Revenue Code of 1986. Numerous and critical changes introduced by the Act included reducing individual and corporation taxes, increase family tax credits and standard deduction, eliminate personal exemptions directly contribute to improved living standards, more savings, and better housing for the United States citizens.

It is believed that by implementing the Act into law, the country would have more investors, increase job opportunities, and increase the overall income and household standards. Unfortunately, the changes addressing individual income are temporary. The policy has more and substantial advantages than its drawbacks. The policy has also expended standard deduction, lowered marginal tax rates across the brackets, as well as child tax credits hence increasing the living standards for the lower households income. The national government will have increased federal deficit and reduced national debt. It is also estimated that the Act will result in the broader economy, reduce the unemployment rate, and increase higher wages by about 1.5%, and creating 339,000 full-time positions. This attract more investors and also reduce the rate of unemployment.

References

Floyd, D. (2020, January 20). Explaining the Trump Tax Reform Plan. Retrieved from Investopedia: https://www.investopedia.com/taxes/trumps-tax-reform-plan-explained/

Gale, W. G., Krupkin, H. G., Mazur, M., & Toder, E. (2018). Effects of the Tax Cuts and Jobs Act: A preliminary analysis. Brookings. Retrieved from https://www.brookings.edu/research/effects-of-the-tax-cuts-and-jobs-act-a-preliminary-analysis/

Kaeding, N., Pomerleau, K., & Muresianu, A. (2018, July 10). Making the Tax Cuts and Jobs Act Individual Income Tax Provisions Permanent. Retrieved from Tax Foundation: https://taxfoundation.org/making-the-tax-cuts-and-jobs-act-individual-income-tax-provisions-permanent/

Lee, R. D., W., J. R., & G., J. P. (2013). Chapter 5: Budgeting for Revenues: Income Taxes, Payrolls Taxes, and Property Taxes. In Public budgeting systems. Burlington, MA: Jones & Bartlett Learning.

Michel, A. (2017, October 19). Analysis of the 2017 Tax Cuts and Jobs Act. Retrieved from The Heritage Foundation: https://www.heritage.org/taxes/report/analysis-the-2017-tax-cuts-and-jobs-act

Tax Foundation. (2017, December 18). Preliminary Details and Analysis of the Tax Cuts and Jobs Act. Retrieved from Tax Foundation: https://taxfoundation.org/final-tax-cuts-and-jobs-act-details-analysis/

WhiteHouse. (2017). The Tax Cuts and Jobs Act. Washington, DC: WhiteHouse. Retrieved from https://www.whitehouse.gov/wp-content/uploads/2018/02/WH_CuttingTaxesForAmericanWorkers_Feb2018.pdf