Let’s start with some good news.
Many households will find relief in their tax bills over the next several years under the GOP tax plan, which President Trump is expected to sign into law this week.
According to the nonpartisan Joint Committee on Taxation, over 50% of filers earning $40,000 and above will benefit from an average tax reduction exceeding $500 in 2019. This positive trend continues for income brackets above $50,000 for the years leading up to 2025.
The Tax Institute at H&R Block has highlighted scenarios showing that families with young children could potentially see their tax obligations decrease by around $2,000 or more next year.
However, here’s a crucial point: All individual tax cuts are scheduled to expire after 2025, while the corporate rate reductions will remain in place permanently under the proposed legislation.
Consequently, by 2027, most individuals earning less than $200,000 may experience minimal changes in their tax bills or even an increase compared to their current payments, according to the JCT’s forecasts.
Related: Use the UJ tax calculator to see your potential outcomes under the GOP plan
The temporary nature of individual tax cuts was a necessary compromise to adhere to budget regulations, allowing Republicans to advance their tax reform without Democratic support.
Nonetheless, they reassure that future Congresses will avoid letting middle-class tax cuts lapse. Historical patterns, such as the repeatedly extended Bush tax cuts, lend some credence to this claim. However, it’s essential to acknowledge that circumstances can evolve drastically over eight years.
Moreover, there’s another potential reason that could lead to a tax increase post-2025.
While the tax cuts may be temporary, the GOP tax plan enshrines a significant provision that tax expert Lily Batchelder has characterized as a “stealth tax increase” on individuals, with effects expected to amplify over time.
This increase is a critical component of the funding for the permanent corporate tax cuts in the following decade, as per Batchelder, a tax law professor at New York University.
Related: Explore the final details of the GOP tax plan
The GOP proposal introduces a new, slower inflation adjustment known as chained CPI, which will be applied to aspects of the tax code that are inflation-sensitive. Consequently, income thresholds for the seven tax brackets will rise at a slower rate, as will the values of various tax credits and the income phaseout limits for several deductions. These limits determine eligibility for specific tax breaks based on income levels.
The implication for taxpayers is significant: many tax deductions, Batchelder noted, “will depreciate over time compared to current law, pushing individuals into higher tax brackets incrementally.”
UJ (New York)
First published December 20, 2017: 4:54 PM ET
