This month marks the two-year anniversary of the Tax
Cuts and Jobs Act, the most sweeping update to the U.S. tax code in more than
30 years.
The reforms simplified the process of paying taxes,
lowered rates on individuals and businesses, and updated the business tax code
so that American corporations and the people they employ can be globally
competitive again.
The tax cuts included a long list of reforms that are
worth reviewing.
For individuals, the tax cuts reduced federal income tax rates, increased the standard deduction, doubled the child tax credit, repealed the personal and dependent exemptions, and capped the deductions for state and local taxes, among many other reforms. These expire at the end of 2025.
For businesses, the law permanently lowered the
corporate tax rate to 21%, down from a global high of 35%, and temporarily
allowed businesses to fully deduct most new U.S. investments.
Lower
Taxes
The tax bill cut taxes for the vast majority of
Americans—nine out of every 10 people saw a tax cut or no change in what they
paid.
Using IRS data, The Heritage Foundation found that average households in every congressional district were projected to benefit from a tax cut in 2018. Most Americans received their tax cut through lower employer withholding and thus bigger paychecks.
The average American was projected to get a $1,400 tax
cut in 2018 and $2,900 for a family of four.
We don’t have to guess anymore about the effects of
the tax cuts. After actually filing their taxes with the
IRS,
Americans saw their average effective tax rates decline by 13% (or about 1.5
percentage points). Despite claims to the contrary, every income group
benefited from the tax cut.
There were also significant time-savings and simplification. Not
every part of the tax code was streamlined, but for most individual taxpayers, taxpaying
is now more straightforward.
In 2017, 30% of households itemized their taxes, a
more complicated process of documenting and calculating a list of discrete
write-offs, such as the mortgage interest and charitable deductions.
In the first year of the tax cut, itemizers dropped from
30% to 10%, showing that millions of Americans opted for the single, simpler
standard deduction. Under the new system the number of people who were able to
do their own taxes increased
by 4.4%.
Higher
Wages
American workers and businesses have been doing better
almost every year since the Great Recession. But the past several years have
been different. Things aren’t just a bit better—we’ve been setting records.
Unemployment is at a 50-year low of 3.5%. Businesses
have added jobs for 110 straight months, the longest streak on record, and
there are more jobs available than people looking for them.
Wages have also been increasing. Average wage growth over
the past year was 3.1% in the most recent government data. Non-supervisory and
production worker wages grew even faster, at 3.7%. Before 2018, wage growth
hadn’t reached 3% since 2009.
The lowest wage earners in the U.S. have been experiencing
some of the largest wage gains. The 10th percentile wage earner (people making
about $12 an hour) have benefited from a 7% wage increase from the third
quarter of 2018 through the same in 2019, in the most recent quarterly
data.
That’s more than twice the gain in average wages and roughly equivalent to a
$1,500 raise for someone earning less than $25,000 a year.
Minorities are also seeing larger than average gains.
Lower-wage black workers have seen wage growth of 8.5%, and similar low-wage
black women workers saw gains larger than 10%. Similar trends can be seen for
low-wage Asian workers, Hispanic women, and people without a high school
degree.
Between the tax cuts and wage gains, The Heritage
Foundation calculated that over the decade following the tax
cuts, the typical American household will reap an additional $26,000 in
take-home pay or $45,000 for a family of four. That’s more than enough to buy a
new car or put a down payment on a house.
The American people seem to be internalizing all the
good news. Job satisfaction
and consumer confidence are high. Thanks to the strong economy, Americans who
aren’t happy at their current work are voluntarily leaving their jobs for
better opportunities at close to record rates.
And Americans are saving more too, using the good economic times to prepare for
their future.
What
About Investment?
The main way the tax cuts are expected to contribute
to furthering the good economic trends is through increased business
investment, which leads to more jobs, better technology, and eventually
productivity gains. Each of these things helps boost wages.
Historically, reforms that lower business tax rates
and allow more investment
write-offs lead to increased business activity. Thus, economists
expected economy-wide investment to increase following the reforms, and that’s
exactly what happened.
It wasn’t until uncertainty regarding trade and tariffs
in the following year dragged investment back down below pre-tax reform
projections. The trade war seems to be hiding the tremendous successes of the
2017 tax cuts.
Immediately following the reforms, business fixed
investment, new business applications, and other indicators, such as business
confidence, all surpassed expectations.
For example, immediately after the tax cuts were signed into law, business
investment increase by 39%
among the 130 in the S&P 500.
In such a turbulent policy environment, assessing the
long-term success of tax reform will take time as new investment and increased
productivity do not happen instantaneously.
The challenge for lawmakers will be to keep taxes low
in the coming years so that the full economic benefits of the 2017 tax cuts can
be enjoyed by generations to come.
The post How 2 Years of Tax Cuts Have Supported Our Strong Economy appeared first on The Daily Signal.
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