There has been an incredible amount of false rhetoric regarding tax reform recently. As a Texas Certified Public Accountant (CPA), former energy CEO and a former chief financial officer for three multi-national businesses, I have a comprehensive and deep “real world” understanding on the impact of tax policy on American wage growth, economic activity and international competitiveness. I rely on that expertise to write and set the record straight regarding tax reform.
As we begin 2018, we have set the framework to usher in a new era of American prosperity. Relief is on the way for working-class American families, many of whom now live paycheck to paycheck. According to recent studies, a majority of these families have less than a $400 cash reserve to handle financial emergencies. In addition, many of these individuals and families have experienced little to no growth in their take-home pay during the 2006-2016 time period. During that time, income inequality grew at the fastest rate in decades, while these families were left behind and saddled with higher health-care costs and higher costs of living.
When the House of Representatives started working on tax reform in 2011, these are the families and individuals that we kept in the forefront of our thinking. Our goals during the tax-reform process were twofold — first, to help working-class families keep more of their paychecks, and second, and most importantly, to provide a tax infrastructure that would grow jobs and economic opportunities for these families.
History proves empirically that tax reform and tax cuts, when properly executed, will generate higher economic growth, more job opportunities and larger paychecks. A quick review of gross domestic product (GDP) growth, employment growth and wage growth following the tax cut/tax reform initiatives of President John F. Kennedy in 1963 (enacted in 1964); President Ronald Reagan in 1981-1982; and again under Reagan in 1986 shows that working-class families experience substantial economic benefits when America fixes its tax system. In particular, the last comprehensive overhaul of our tax code, during the Reagan administration in 1986, led to a significant boost in our nation’s economic activity. During that time, American GDP growth averaged about 3.9 percent and reached as high as 4.2 percent. This economic opportunity is substantially better than the 2009-2016 period when average GDP growth was an anemic 1.5 percent.
The Tax Cuts and Jobs Act, signed into law on Dec. 22, creates a tax code for the 21st century that will lead to more jobs, bigger paychecks and fairer taxes for these hardworking American families. Under the new tax code, which will start on January 1, a typical family of four earning the median family income of $73,000 per year would see a 58 percent reduction in their tax bill. For this family, it means they get to keep over $2,000 more of their take-home pay. A family of four with annual income of $59,000 will see their taxes drop about 75 percent from approximately $1,600 to about $400.
While some on the left have criticized these cuts, it is important to think about the impact that this increased take-home pay will have on these families. This increased cash flow is particularly impactful when looking at the average $400 cash reserves held by these families who struggle to get by on a paycheck-to-paycheck basis. These families will begin feeling these benefits in February as the IRS adjusts tax withholding tables; and April 15, 2018, the last date they will have to file their tax returns under today’s broken tax code. Their tax filings for 2018 and subsequent years will be much easier and simpler.
These families are helped by four major reforms. First, by nearly doubling the standard deduction — to $12,000 for individuals and $24,000 for joint filers — their tax-free earnings are significantly larger. Second, doubling the Child Tax Credit will give parents extra money to meet their families’ living expenses. Third, lowering tax rates across the board allows every American to receive a long-overdue tax cut. Fourth, and most importantly, the tax reforms for American businesses will generate hundreds of thousands of new jobs and larger paychecks.
Despite false claims to the contrary, this tax reform was NOT rushed through Congress. The Tax Cuts and Jobs Act is the result of years of work that began in earnest in 2011 when Republicans regained the majority in the House. Since then, the Senate and the House have held more than 100 tax-related hearings to ensure that input from all stakeholders including families, individuals, small businesses and the largest American companies would be included in shaping tax reform. I am particularly proud that constituents from the 17th Congressional District participated in this process by letting their voices be heard. Hearings even included compelling Ways and Means Committee hearing testimony from the leader of a women-owned business in our Central Texas congressional district.
After a number of years and thousands of hours of input, the Tax Cuts and Jobs Act was formally introduced. The House and Senate tax-writing committees each spent four days considering and improving the bill. After each chamber passed its version of the bill, the conference committee began working to reconcile differences and to make the final bill stronger so that more hardworking Americans could feel the benefit of comprehensive tax reform.
Immediately after the bill was signed by President Trump, several American businesses announced that they are issuing special 2017 employee bonuses, raising wage levels, investing in job-training and investing in America to grow their businesses. It is obvious that tax reform is already having a significant, positive impact on American families. These effects will expand and, when combined with the increase in GDP to 3.3 percent under the first year of President Trump’s economic policies, our economy will continue to grow and American families will benefit.
Critics of America’s new, improved tax code have also falsely claimed that it will create “Armageddon” consequences, including increased deficits, cuts to Medicare, Medicaid, etc. These claims are categorically false. They are beyond the pale and, worse, they are designed to create fear among American families who are just trying to recover from the broken economic policies of the past.
History shows us that well-designed tax reform and tax cuts generate more economic activity, more income and more revenues for the federal government. In this regard, a recent study by the Department of Treasury (the folks who implement tax policy) shows that our new 21st century tax code will generate reduced federal deficits of approximately $300 billion over the next 10 years. Social Security, Medicare, Medicaid, safety net programs, etc. will not be adversely impacted by the new tax code.
There are numerous other positive provisions of the new tax code that we could discuss. However, I want to focus on one that is important to higher education in our Central Texas region — the tax treatment of tuition discounts and waivers for graduate students. In this regard, I am pleased to report that throughout the legislative process of the Tax Cuts and Jobs Act, my team and I worked diligently on behalf of graduate students to preserve provisions that protect beneficial tax treatment for waived and discounted tuition incentives. We were successful in our efforts and the new tax code includes the beneficial tax treatment currently enjoyed by graduate students.
The newly signed Tax Cuts and Jobs Act will pave the way for economic gains across all sectors of our economy, jump-start wage growth and allow all Americans to keep more of their hard-earned money in their paychecks. It is a much-needed, fresh opportunity for hardworking American families across Texas and throughout the United States.