The New U.S. Tax System

On 22^nd of December 2017, the U.S. President Donald Trump signed a ‘Tax Cuts and Jobs Act’, which introduces the most drastic changes of the U.S. Internal Revenue Code since 1986. The new U.S. tax bill, which becomes effective in 2018, includes a wide range of tax reforms that changes the rates of individual and corporate taxes, credits, and tax deductions. It is estimated that the new tax package will drive up a U.S. budget deficit by about USD 1,5 trillion.

The new tax law contains temporary provisions for individual taxpayers, which will technically expire in 2025, and permanent tax cuts for corporate taxpayers. Below, we provide the main takeaways from the major amendments in the U.S. tax system.

Changes in personal taxes

U.S. individual taxpayers will be subject to the following fiscal changes:

1. Reduction of individual income tax rates in the 5 out of 7 income brackets for the time period of 2018-2025:

• 6% to 37%;
• 33% to 32%;
• 28% to 24%;
• 25% to 22%; and
• 15% to 12%.

2. Rise of standard deductions for married joint filers (from USD 13.000 to 24.000), single fillers (from USD 6.500 to 12.000), and heads of households (from USD 9.550 to 18.000) for the time period of 2018-2025.
3. Permanent removal of individual mandates under the Affordable Care Act as from 2019. Individuals will not receive penalties for not owning health insurance.
4. Rise of the child tax credit from USD 1.000 to 2.000 and introducing a non-refundable credit of USD 500 for non-child dependents.
5. Increase of tax exemptions with regard to estate and gift (inheritance) taxes from USD 5 million to 10 million.

Changes in corporate taxes

U.S. corporate taxpayers will encounter the following fiscal changes:

1. Migration to a territorial tax system combined with base erosion rules.
2. Replacement of the current top corporate tax rate of 35% by a single 21% rate as from 2018.
3. Creation of a deduction of 20% for pass-through income of small businesses (sole proprietors, partnerships, and S-corporations) that are subject to personal income tax.
4. Allowance of full and immediate expensing of short-lived capital investments for 5 years.
5. Limitation of the deductibility of net interest expense to 30% of earnings.
6. Limitation of net operating carry-forwards to 80% of taxable income and eliminating net operating loss carry-backs.
7. Revocation of the corporate alternative minimum tax of 20%. The personal alternative minimum tax remains in force with raised exemptions and phase-outs.
8. Introduction anti-base erosion measures that will limit U.S. companies from shifting profits to lower tax jurisdictions.

Debate

The overhauled U.S. tax regime has a twofold aim: (1) to provide tax reliefs for American middle-class families, workers and job creators; and (2) to boost the country’s economy. However, the new U.S. tax law receives severe criticism as benefiting mostly the top rich individuals and large corporations due to the significant permanent tax cuts. The opponents of the bill state that the middle-class taxpayers will encounter much less benefits and such benefits will be valid for a short term only.