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Republicans Propose Big Tax Cuts, But Target Popular Deductions

Speaker of the House Paul Ryan, surrounded by American families and members of the House Republican leadership, introduces tax reform legislation on Thursday in Washington, D.C.
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Speaker of the House Paul Ryan, surrounded by American families and members of the House Republican leadership, introduces tax reform legislation on Thursday in Washington, D.C.

Updated at 3:10 p.m. ET

House Republicans unveiled a draft tax bill on Thursday, calling for deep cuts in both individual and corporate tax rates.

"With this bill, we will grow our economy by delivering more jobs, fairer taxes, and bigger paychecks to Americans of all walks of life," said Rep. Kevin Brady, R-Texas, chairman of the House Ways and Means Committee.

The rollout, originally scheduled for Wednesday, was postponed to give bill drafters more time. They're still struggling to find sufficient revenue to avoid a budgetbusting score. As a result, some of the tax changes have been made temporary or phased in over time.

Here are some of the highlights of the bill (you can read the full text here):

  • Seven individual tax brackets would be reduced to four brackets — 12 percent, 25 percent, 35 percent, and the current top rate of 39.6 percent remaining in place for the very wealthy.
  • Corporate taxes would drop from 35 percent to 20 percent permanently.
  • Standard deduction would increase from $6,350 to $12,000 for individuals and from $12,700 to $24,000 for married couples.
  • Child tax credit would expand from $1,000 to $1,600.
  • Federal deductions for state and local income and sales taxes would be eliminated, but local property taxes would be deductible up to $10,000.
  • No changes to limits on 401(k) pretax contributions.
  • Alternative minimum tax would be repealed.
  • Estate tax would kick in at $11.2 million, up from $5.49 million, but it would be fully repealed as of 2024.
  • Corporate profits from overseas would no longer be taxed, but there would be a minimum 10 percent tax on foreign subsidiaries.
  • The plan leaves intact a top individual tax rate of 39.6 percent to address criticism that the cuts are unduly favorable to the rich. The bill would raise the income threshold at which the top tax rate would apply to $500,000 for singles and $1 million for couples. In a boost for the wealthy, the plan also eliminates the alternative minimum tax and phases out the estate tax over a period of six years.

    Broadly speaking, the GOP bill would sharply reduce taxes on both individuals and corporations, potentially draining trillions of dollars from federal coffers over the next decade. The Republican budget, however, makes room for only $1.5 trillion in revenue reduction over that period. And fast-track Senate rules, designed to avoid a Democratic filibuster, say the bill can't add to the deficit beyond 10 years.

    Republicans hope to offset some of the lost revenue from lower tax rates by eliminating tax breaks elsewhere in the code.

    "With this plan, we are getting rid of loopholes for special interests and we are leveling the playing field," said House Speaker Paul Ryan, R-Wis.

    But that is politically challenging. Two of the costliest tax breaks — for mortgage interest and gifts to charity — were declared off limits at the outset, although the draft plan restricts the mortgage deduction on future home purchases to loans of $500,000, down from the current $1 million. Efforts to curtail other popular breaks — for retirement savings and state and local taxes — have faced pushback from the White House and Republicans in high-tax states.

    The bill nearly doubles the standard deduction, which will make tax filing easier for some people. However, it eliminates personal exemptions, which could adversely affect larger families.

    President Trump suggested the reduced corporate tax rate would help to spur economic growth.

    "At 20 percent, we're very, very competitive with the rest of the world," Trump said during a White House meeting to celebrate the bill's release. "You're going to see growth and you're going to see jobs and you're going to see really wages going up."

    The bill also aims to encourage business investment by allowing companies to deduct those costs immediately, rather than spreading the deduction over a period of years. However, this provision is scheduled to sunset after five years.

    In addition, a lower tax rate of 25 percent would be established for so-called pass-through businesses, such as partnerships that currently pay taxes at their owners' individual rate.

    Multinational corporations would no longer be taxed on profits earned overseas, although the plan would establish a minimum tax rate of 10 percent on foreign subsidiaries.

    Democrats blasted the GOP plan as a giveaway to corporations and the wealthy.

    "The American people deserve real, bipartisan tax reform that puts the middle class first, [creates] good-paying jobs and lowers the deficit," said House Democratic leader Nancy Pelosi of California. "This Republican plan doesn't do any of that."

    Although House lawmakers floated the idea of limiting tax breaks for retirement savings, the draft bill unveiled Thursday would preserve the deduction for 401(k)-style savings.

    The bill would eliminate the deduction for state and local income taxes, a move that would be particularly costly in high-tax states such as New York, New Jersey and California. In an effort to mollify House Republicans from those states, drafters included a provision to allow taxpayers to deduct up to $10,000 in local property taxes.

    But Democratic Senate leader Chuck Schumer of New York warned that the GOP push to limit tax breaks would leave some families paying more.

    "Republicans are trying to argue that the middle class gets a tax break," Schumer said. "But what they won't tell you is that many, many, many middle-class families will see their taxes go up under this plan."

    The lower limit on mortgage interest that's tax-deductible is sure to invite opposition from the housing industry, a powerful player in Washington.

    "Eliminating or nullifying the tax incentives for homeownership puts home values and middle-class homeowners at risk," said William E. Brown, president of the National Association of Realtors.

    The Ways and Means Committee plans to take up the draft tax bill next week, with an eye toward a House vote before Thanksgiving. Trump is eager to sign a tax overhaul by December.

    "We're working to give the American people a giant tax cut for Christmas," Trump said. "It will also be tax reform and it will create jobs."

    Copyright 2021 NPR. To see more, visit https://www.npr.org.

    Scott Horsley is NPR's Chief Economics Correspondent. He reports on ups and downs in the national economy as well as fault lines between booming and busting communities.