With sweeping federal tax reform being proposed, UNO students will see both immediate changes and long-term effects.
Both the U.S. House of Representatives and the Senate released tax plans the first week of November that open discussions about the scrapping of certain tax deductions for student loan interest and healthcare expenses, lowering the corporate tax rate, changing the tax rate for certain small businesses, widening the gap of wealth inequality, increasing the deficit and repealing the estate tax.
Under the proposed Tax Cuts and Jobs Act by the House, a deduction would be discarded for borrowers who pay $2500 or less in student loan interest, along with a deduction for certain medical expenses. The Senate’s version would keep these deductions.
For University of Nebraska at Omaha students with student loans, proposals like this could mean a lost opportunity to save money in the future as they pay their loans off.
The cutting of the medical expense deduction could cause “huge damage” to the health insurance market, creating more uninsured Americans while adding to the cost of medical expenses, said Dr. Zhigang Feng, an associate professor at UNO who teaches economics and business administration. He is currently working on a research project about U.S. health care policy and its effects on a macroeconomic scale.
Without any remedying action by Congress, damage would be seen through the loss of “risk-sharing” in the health insurance market as younger, healthier people leave, making it more difficult for the sicker, older population to pay for their medical expenses, Feng said.
While younger UNO students may benefit from this, they will inherit a health insurance market that is even more expensive and turbulent once they are older.
Both versions of the bill propose cutting the tax rate for corporations from 35 percent to 20 percent – an “average” corporate tax rate in a developed economy, Feng said.
This could create more jobs for UNO graduates, especially in the Omaha metro area where there are many large corporations.
However, Feng said that while the tax cuts are necessary for short-term growth in the U.S. economy, long-term growth would be found if Congress created more incentives and deductions for small businesses – something that wasn’t done in either versions of the Tax Cuts and Jobs Act.
“They [large corporations] are not engines for big growth,” Feng said. This is because, typically, smaller startup businesses are more apt to produce new ideas and technology, he said while exemplifying Facebook.
In fact, Feng said that it is more likely for millennials to be self-employed than past generations, but this tax overhaul does not address strengthening that future growth. Instead, new taxes for small “pass-through” businesses are being put in place.
In the current tax system, these “pass-through” businesses, which include partnerships, sole proprietorships, limited liability companies and S corporations, generally pay through the individual tax system.
The House bill would make a new 25 percent income tax for these businesses. The Senate’s bill would allow taxpayers a to deduct up to 17.4 percent of qualifying businesses, which according to a report by the New York Times, would leave small businesses with even less savings.
Under the current law, a “pass-through” business filing under the individual tax system already qualifies for a 25 percent income tax as long as it makes more than $37,950 in one year, and if it makes more than $91,900, the business may actually see a lower tax rate.
For many of the small businesses and startups that millennials will create though, incomes can be low the first few years. The proposed changes could cause greater harm than good for these businesses by hindering their success and the long-term growth of the U.S. economy, Feng said.
While most individual taxpayers will see reduced taxes with the new tax plan, 50 percent of the benefits will be for those in the top one percent of people with the highest incomes by 2027 while 25 percent of Americans will see tax increases by then when compared to the current system, according to a report by the Tax Policy Center.
Income inequality has already been widening for Americans. According to a report by the Pew Research Center, the disparity is at its greatest since 1928.
Feng said that the individual tax changes are based on the theory of “trickle-down economics”, which entails giving tax cuts to the wealthy while expecting the wealth to “trickle down” to the middle and lower classes. While this theory will work, he said, it will still benefit the wealthy the most.
Additionally, the House version of the bill will add $1.7 trillion to the federal deficits over the next 10 years, according to a report by the Congressional Budget Office.
“We are going to benefit, but we benefit less than wealthier families or people with higher incomes,” Feng said. “But down the road, there will be a debt burden and it will be shared by everyone.”
While the debt burden will not largely affect people in the present, it could potentially decrease economic growth in the long-term, said Feng.
For UNO students, this means they will inherit a federal government with an even greater debt burden while society bears more income inequality.
However, the American Farm Bureau Federation released a statement on Nov. 9, 2017 approving the bill proposed by the House, particularly because it includes a repeal of the estate tax.
Under the current system, the estate tax charges a tax on the property transferred at the time of someone’s death, including money saved, land and property owned that amounts to more than $5.49 million. By 2024, the House bill repeals the tax, allowing farmers to pass their land on to their heirs without significant taxation. While the Senate version does not repeal the tax, it does double the threshold to be more than $10 million.
For UNO students who are heirs to family farms, both versions of the bill could save them thousands of dollars in taxes when they receive the land after the death of a family member.