Tax Reform

The highly anticipated “One, Big, Beautiful Bill” aiming to extend and modify the 2017 Tax Cuts and Jobs Act (TCJA) has passed the House and is now heading to the Senate. This comprehensive tax legislation, as with any major reform, presents a complex mix of beneficial provisions, questionable decisions, and outright complicating additions. This article breaks down the key aspects of the bill, analyzing its potential impact on the economy, businesses, and individual taxpayers.

The Good: Stability, Simplification, and Strategic Reforms

The bill introduces several positive changes that align with principles of tax stability and simplification, offering much-needed certainty for taxpayers and businesses.

Bolstering Stability and Certainty

Permanent Individual Tax Cuts: A cornerstone of the bill is the permanent extension of the 2017 individual tax rates and brackets. This provides crucial long-term certainty for households, eliminating the looming threat of higher taxes at the end of the year.
Enhanced Standard Deduction & AMT Threshold: The bill permanently extends the larger standard deduction and the increased alternative minimum tax (AMT) threshold, provisions that have significantly simplified tax filing for millions of Americans.
Permanent Section 179 Expensing: For small businesses, the bill makes permanent the higher threshold for Section 179 expensing, allowing them to deduct the full purchase price of qualifying equipment and software, fostering investment.
Stable Estate and Gift Tax Exemption: The bill institutes a permanent and inflation-adjusted estate and gift tax exemption level of $15 million starting in 2026, further enhancing stability in this area.
International Tax Certainty: The bill permanently extends a slightly less generous version of the current international tax regime (GILTI, FDII, and BEAT), offering stability and removing the threat of substantially higher taxes for US-based multinational companies.

Improving Business Cost Recovery

From 2025 to 2029, the bill significantly improves cost recovery for US businesses.

Reintroduction of Expensing: The bill reintroduces expensing for investments in equipment, other short-lived assets, and domestic research and development (R&D). This allows businesses to deduct the full cost of these investments immediately, rather than over several years.
Expensing for Qualified Structures: A new and beneficial policy is the eligibility of certain qualified structures for expensing, further incentivizing business investment.
Less Restrictive Interest Deduction Limitation: The TCJA’s less restrictive limitation on interest deductions is also reinstated, providing more flexibility for businesses in financing their operations.

Strategic Revenue-Raising Reforms

The bill also includes commendable policies that aim to raise revenue by curtailing certain tax credits, deductions, and preferences.

Green Energy Tax Credit Reforms: The largest area of reform is within the Inflation Reduction Act’s (IRA) green energy tax credits, which are projected to raise approximately $500 billion over a decade by reducing their cost by about half.
Repeal of Ineffective IRA Credits: Several expensive and often ineffective IRA credits, such as those for electric vehicles (EVs) and residential energy products, are repealed.
Health Insurance Premium Tax Credit Adjustments: Health insurance premium tax credits, projected to cost around $1 trillion over the next decade, are pared back by approximately 20 percent through tighter eligibility rules and efforts to reduce improper payments.
Tightening Tax-Exempt Rules: The bill also tightens some tax-exempt rules, including those related to unrelated business income.
Permanent Limitations on Itemized Deductions: While some itemized deduction limits are permanently extended, such as for mortgage interest, the bill does raise the State and Local Tax (SALT) deduction cap to $40,000 for taxpayers earning less than $500,000, a move that could benefit many.

The Bad: Costly Gimmicks and Missed Opportunities

Despite the positive aspects, the bill contains several problematic provisions that prioritize political expediency over sound economic policy, leading to a substantial fiscal cost with only modest economic gains.

Unnecessary and Costly Carveouts

Tax Exemptions for Overtime, Tips, and Auto Loans: The introduction of tax exemptions for overtime pay and tips, along with a deduction for auto loan interest and a new additional standard deduction for seniors, are costly additions that violate basic tax principles of equal treatment. These provisions alone are estimated to cost around $300 billion over four years and potentially double over a decade if extended.
Complicated Eligibility Restrictions: While some complicated eligibility restrictions attempt to mitigate the cost, these provisions are fundamentally flawed and introduce unnecessary complexity.

Flawed Approach to Non-Corporate Businesses

Permanent and Increased Pass-Through Deduction: A significant misstep is the decision to make the 20 percent deduction for pass-through business income permanent and increase it to 23 percent. This will cost over $700 billion over the next decade, further widening the gap in effective tax rates between pass-through businesses and corporations, undermining tax neutrality.

Missed Opportunities for Economic Growth

Failure to Permanently Extend Pro-Growth Measures: A major criticism is the failure to make the most pro-growth features of the bill, such as permanent business cost recovery provisions (100% bonus depreciation, expensing for domestic R&D and qualified structures, and the less restrictive interest limitation), permanent. Had these provisions been made permanent, the long-run GDP increase from the bill could have more than doubled to 1.6 percent.
Insufficient Base-Broadening: Lawmakers could have significantly reduced the bill’s cost by pursuing further base-broadening measures and cleaning up the tax code. This includes further limitations on itemized deductions, rolling back tax exclusions for employer-sponsored benefits (including health insurance), and repealing various tax expenditures like the credit union exemption and the low-income housing tax credit.

The Ugly: Unnecessary Complexity and Ineffective Incentives

The bill introduces a significant amount of new complexity into the tax code, creating compliance burdens that may outweigh any potential tax benefits for many taxpayers.

Labyrinthine New Rules

Complex Exemptions for Overtime, Tips, and Car Loans: The “no tax on tips, overtime, and car loans” provisions come with intricate conditions and guardrails that will likely require extensive IRS guidance to interpret, leading to confusion and compliance costs for taxpayers.
Lingering Complications in IRA Credits: While some IRA credit reforms are positive, the bill retains some of the most complicated rules, such as bonus credits for meeting prevailing wage and apprenticeship requirements, and adds new “foreign entity of concern” restrictions that could make many credits prohibitively expensive to claim.

Ineffective and Overly Targeted Savings Incentives

Complex and Narrowly Targeted Savings Incentives: Despite aiming to encourage saving, the bill’s new incentives are so complex and narrowly targeted that few taxpayers are likely to utilize them. The tax code is already burdened with a confusing array of special preferences for savers, which often go unused by low- and middle-income households.
Expanded, Not Simplified, Savings Accounts: Instead of simplifying existing rules and allowing for universal savings accounts, the bill expands health savings accounts (HSAs) and, to a lesser degree, 529 accounts and ABLE accounts. This adds new rules and conditions for eligible expenses and contribution limits, further complicating the landscape.

The Introduction of “Trump Accounts”

“Trump Accounts” – A New Baby Bonus with Strings Attached: The bill introduces “Trump accounts,” an entirely new incentive that includes a $1,000 “baby bonus” for children born over the next four years. While allowing tax-free growth on contributions up to $5,000 annually until age 18, withdrawals are subject to capital gains tax for qualified expenses or ordinary income tax plus a 10 percent penalty otherwise.
Limited Utility and Administrative Burden: This limited and restricted benefit is unlikely to be widely used as a savings vehicle. Its primary effect is to introduce a new entitlement that requires taxpayers to track a small dollar account for over 18 years, creating an administrative burden for both taxpayers and the IRS.
Potential for Abuse and Administrative Strain: The bill also allows tax-exempt entities to contribute to Trump accounts under rules to be established by the Treasury Secretary, which could lead to substantial benefits for some account holders. Additionally, a new tax credit for donations to scholarship-granting organizations (up to $5,000 annually through 2029) may work in tandem with Trump accounts. While potentially beneficial for low-income children, these provisions require extensive rulemaking and administration from an already overwhelmed Treasury Department and IRS.

Conclusion

The “One, Big, Beautiful Bill” represents a mixed bag of tax reforms. While it offers some commendable steps towards stability and simplification, particularly in individual and international taxation, it falls short in terms of economic growth by prioritizing political carveouts over more impactful pro-growth measures. The introduction of overly complex and narrowly targeted provisions, such as “Trump accounts,” further complicates an already intricate tax code, potentially creating more headaches than benefits for many taxpayers.