The Effects of Tax Cuts & Jobs Act: an Individuals Perspective
When keeping up with major political news, one must be able to assess what sort of legislation may result in important changes of investment prospects. Taking the relatively recent 2017 Trump administration tax cuts as an example, this series will explore how new legislation can affect the individual, the nation as a whole, and financial markets.
The Trump administration fulfilled a major campaign promise in November 2017 by passing legislation that significantly reduced federal taxes, the first since 1986. Critics argued that this would stymie economic growth and favor the rich. Numerous sources aid in analyzing the changes the average American might experience.
The latest average household income figures, according to the U.S. Census Bureau, came in at $61,372. A single adult with earnings of $61,372 saved $1,681 in taxes compared to 2017. Assuming a single adult earned $250,000, that tax payer saved $6,910 in taxes. A typical family household will always save more in taxes compared to single adults due to the child tax credit system. Overall, the marginal tax bracket and the taxable rate on income for a single adult dropped by 3%. A survey conducted in a financial management firm in Rochester, New York found that 72% of the participants saved taxes under the TCJA 2017. Critics were partially accurate in pointing out that this tax scheme overwhelmingly favors the wealthy. However, advocates for this new legislation evoke theories of supply side economics, implying TCJA 2017 would result in large scale future investments.
According to MSCI Inc., stock buybacks rose 52.6% compared to 2017. Though the total amount of shareholders decreased, the earnings per share rose. Buybacks do not necessarily mean a lack of investment, nor slow economic growth. The over-investment in research and development has yet to produce concrete capital investment opportunities. Hence, venture capitalists remain reluctant to invest. Neither buybacks nor heavy R&D investments come as a direct result from the TCJA 2017. Therefore, the argument made by advocates in favor of the legislation has yet to see substantive evidence.
The TCJA 2017 had major effects on small businesses, which employ almost 50% of the American labor force. In addition to the lower individual/household tax rates, a 20% QBI (qualified business income) deduction was introduced for small businesses, meaning taxable net income can be reduced up to 20%, allowing the business (owner) to move into a lower tax bracket. Similarly, the Section 179 Deduction was expanded, allowing businesses to write off the total amount of purchased equipment immediately, rather than calculating depreciation every fiscal year. The equipment must “qualify”, meaning it is used over 50% of the time and costs only up to $2,000,000. Since 2017, small business optimism has risen to the highest levels ever recorded, as shown below in the US NFIB Business Optimism Index.
The Trump administration tax cuts provide a major financial boost for individuals and small business owners. The TCJA 2017 may not have achieved the investment goals it was anticipating yet, however the immediate effects on the American household are such that a substantial part of their income is retained.
Editing by Tom Handels