As college students, we may not be especially interested in our taxes yet. However, if we plan on getting a promotion or scoring a higher paying job after we graduate, this is definitely an issue that is going to affect our pocketbooks. Tax reform, especially these proposed bills, impacts Americans of all incomes, from $0 on up.
Taxes, although necessary for our government to run effectively, are something nobody enjoys paying. No matter their employment or economic status, most all Americans want their taxes reduced.
The House Ways and Means Committee and the Senate Finance Committee have recently taken some significant steps in regards to taxes that all Americans should know about. House Republicans have been developing a tax reform bill which was released on November 2, and entitled the “Tax Cuts and Jobs Act”. A week later, on Thursday, November 9, Senate Republicans released their own version of the bill– and there were a lot of changes.
This is very important legislative news because if either bill is passed, this will be the biggest tax reform since 1986.
In a speech in Harrisburg, Pennsylvania, President Donald Trump discussed his goals for tax reform, “Now is our chance to reclaim America’s destiny. We can breathe new life into struggling industries and forgotten towns. We can end the special deals for special interests, and we will honor the hardworking, patriotic Americans who make this country run.”
Because passing a tax reform bill is so important, we need to know which version of it is best for the American people– House or Senate?
House Bill Wins:
1. Saving Taxpayers More Money
First off, the House bill would raise the standard deduction amounts higher than the Senate version would. This is a good thing because “standard deduction” means the amount of money that can be taken off a taxpayer’s bill.
Under the House plan, a taxpayer who is filing single will have $12,200 of income free of taxes (compared to the current $6,500). Married couples filing together will have $24,400 of income free of taxes (compared to the current $13,000). Heads of household will have $18,300 of income free of taxes (compared to the current $9,550). That is a lot of money American taxpayers could keep on hand per year.
The Senate would raise the deductions to $12,000, $24,000 and $18,000, respectively. Granted, both plans are massive positive changes, and it is a close call, but since it saves Americans a few hundred dollars, the House narrowly wins here.
2. Helping families with kids
One of the most important issues for taxpayers with kids will be the Child Tax Credit and family plans. Under current law, the government can give taxpayers $1,000 of income free of taxes per child if they have children. This is called the Child Tax Credit (CTC).
Under the House’s plan, that amount would rise to $1,600 per child. This is very significant, because it, along with raising the standard deduction, helps offset the proposed loss of the personal exemption. Raising the CTC can save a massive amount of money for middle and low class families.
Adding on to the above, the House bill would make the Child Tax Credit refundable. This would not only save families money, it would make the system much less complex. With the current system, there are two child credits: the regular CTC and the ACTC.
Currently, if someone owes nothing in taxes because their income is so small, the CTC doesn’t help them. Once the bill is down to zero owed, they cannot receive any money from the government as a refund using the CTC. Currently, the credit can only be refundable if a family is eligible for the Additional Child Tax Credit (ACTC). The ACTC is applied only if the taxpayer’s yearly income is more than $3,000 and/or they have three or more children.
With the House’s plan, the refund would be through the CTC, not the ACTC. It would be available for all income levels that owe nothing in taxes (low class), not just those over $3,000. This benefits people with very low income. Also, if the taxpayer has only one or two kids, they can still receive a refund.
Under the proposed House plan, the government’s child tax credit would give families of any yearly salary a refund of $1,000 per child (starting out– this is hoped to get to $1,600 from inflation). For example, if a taxpayer has an income of $2,000 per year and has two children, they would get a refund of $2,000 (for two kids). So not only would qualifying low-income taxpayers owe zero in taxes (as is now), they would also get a refund of $1,000 per child to keep. Hopefully, this extra money would help these families get back on their feet and cover extra expenses.
Also, a $300 credit would be given to filers, their spouses and any non-child dependents (such as the elderly or disabled) under the House bill. However, this particular credit would only last for five years.
The Senate bill would also make the first $1,000 refundable, just like the House. It would raise the Child Tax Credit higher– to $1,650– and raise the age limit from 17 to 18. Although these may seem equally good and even better than the House’s plan, the Senate’s plan gets rid of the $300 credit, replacing it with a non-refundable $500 credit that is very limited– it would only be given for non-child dependents.
Therefore, simple math makes it clear that the House’s plan wins for families with kids. With the House, families would receive $1,600, plus $300 per filer, spouse, or non-child dependent, for a total of around $1,900 (assuming there is at least one filer and one child). With the Senate plan for a family (with no non-child dependents), the total money received would be $1,650 (one child). It is worth noting that the House’s $300 credit would expire after five years. So, hopefully, that can be altered in future legislation.
3. Promoting American business to create jobs and raise wages
The House Bill also does better for American business (which means creating more jobs!). Both the House and Senate bills would lower the top corporate tax rate from the current 35% to 20%. This would make America much more competitive with other countries around the globe. Also, companies would be much more likely to come back to the United States, creating more jobs. The tax cut would also raise people’s wages because their company would not have to pay so much in taxes.
However, the Senate bill wants to delay this cut for a year to save money on the cost of the bill. The House, on the other hand, is ready for companies to start returning to America and is ready to create more jobs that people need with this cut immediately after the bill is passed.
The House plan simplifies the tax system for Americans and reduces the amount of money many middle and lower class taxpayers have to give the government. For example, the current (existing) plan states that if someone is filing single and has a job that pays between $9,525 and $38,700 per year, they have to pay the government 15% of their income.
With the proposed House plan, singles who earn between $0 and $45,000 per year have to pay the government 12% of their income. As the chart below shows, that is a massive reduction for a lot of taxpayers, with figures like 25% being reduced to a 12% rate.
With the Senate bill, the 25% rate would only be reduced to 22.5%. Although any reduction would be great, this is not ideal for the very large group of Americans who earn between roughly $38,000-$45,000.
However, the Senate keeping taxes on lower classes down to 10% is better for those Americans who are on the edge of breaking out of poverty. The large majority of the lowest income level is tax exempt anyway (and would receive benefits from the new bills), so the 10% rate would not affect them. However, for Americans needing some relief as they move up the ladder, this will be a better deal than the House’s higher 12%.
It seems as though this part of the bill could use some compromising, ideally resulting in the Senate lowering the 25% rate all the way down to 12% and the House keeping the lowest at 10%. Those rates would be just about as perfect as we can ask for at this point.
Although both of the bills would result in massive changes, the House bill takes the win this time. Although the Senate bill is not bad, it just does not seem to be as willing to make a change (most likely due to arguments within the GOP and Democratic pressure). The House bill would save American taxpayers more money, assist families with children, and immediately lower the business tax rate. All of these things would help individuals, families, and businesses get ahead and help to lower the anxiety many Americans feel about their money.
Note: This account is by no means all the issues covered by the bills. Much more work needs to be done to ensure the best possible bill for small businesses, et cetera. However, these are the key sections I believe should be preserved (lowering personal taxes, child tax credit, business cuts, etc.).
What are your thoughts on tax reform? Feel free to share your ideas in the comments below or click the comment button on the top left of the screen by the authors image.