Who are the winners and losers of the new federal tax plan, and how will it affect you?

University of Virginia School of Law professors George Yin and Ethan Yale recently weighed in on what the Tax Cuts and Jobs Act of 2017 means for taxpayers, businesses and the overall economy.

From what they can tell, the legislation will be a mixed bag in terms of impact.

Yin, the Edwin S. Cohen Distinguished Professor of Law and Taxation at UVA, served as chief of staff of Congress’ Joint Committee on Taxation from 2003 to 2005. He also served as tax counsel for the Senate Committee on Finance from 1983 to 1985, when the Tax Reform Act of 1986, to which the new law has been compared, was being developed.

One big difference with the new tax bill, however, is how hastily Congress wrote and passed the legislation, Yin said. The 2017 bill took about seven weeks from introduction of the bill to enactment, and no hearings were convened during that period. In contrast, the 1986 act took almost two years with each tax committee conducting more than 40 hearings.

Yale, a professor of law, focuses his research and teaching on tax law and policy, with an emphasis on the taxation of business entities and complex transactions, including tax shelters. He also teaches a class on private investment funds, including hedge funds and private equity funds.

Q. Who are the biggest winners in the tax law?

Yin: Tax professionals and most businesses, large and small.

It is too early to tell which businesses will benefit the most, whether large or small, corporate or pass-throughs, public or private, ones with or without international operations, or ones engaged in specific business activities, but the fact that there will likely be a range of impacts is the sign of a bad tax law, one that imposes greater distortions on the market economy.

Private tax professionals will see an increased demand for their services.

Very wealthy individuals are also big winners, apart from any benefit they may see from being a business owner or an investor, because of the income and estate tax cuts.

We all hope that the nation as a whole will benefit from the business “wins,” but that outcome is very uncertain.

Yale: Those living in states with no state income tax, such as Florida or Texas. Lawyers and accountants who will be flooded with new business. Law professors who will have new rules and regulations to dissect and criticize.

Q. Who are the losers?

Yin: Charities generally, including educational institutions, because of the reduced income and estate tax incentives for giving. The charities most affected will likely be the ones more favored by middle- and upper-middle-income individuals, who may now no longer itemize.

According to the Congressional Budget Office, individuals with income under $30,000 are losers from the very beginning if one counts the lost cost-sharing subsidies resulting from repeal of the Affordable Care Act’s individual mandate penalty. The amount of loss for those individuals is projected to increase quite significantly over time.

Middle- and upper-middle-income individuals who are not business owners also gradually become losers over the 10-year period, in estimations.

The specific impact will vary, depending upon – among other things – a household’s family situation and the amount of state and local taxes it pays.

More generally, the biggest loser may be the nation because of the likely impact of the new law on the deficit and its potentially greater distortions on business activity.

Yale: The biggest losers are U.S.-headquartered multinationals with significant offshore intangible income – Apple, Google, Facebook, etc. – which will now face significant tax on offshore profits not taxed in other jurisdictions. 

Q. Will there be any changes in the process of preparing your taxes?

Yin: Yes. Perhaps two-thirds of individuals who presently itemize will no longer do so under the new law, potentially simplifying their tax-filing work.

Business owners of all types will likely have more choices and therefore face increased complication, at least in the initial years of the new bill.

Uncertainties inherent in the new law will probably plague higher-income taxpayers and all businesses for some number of years.

Finally, the “mere rich” (as opposed to the super-wealthy) may see some simplification of their estate planning because of the higher estate tax exemption levels.

Yale: Many more people will take the standard deduction, and many fewer people will be subject to the alternative minimum tax, which will make things simpler from a compliance standpoint, at least for individual filers aside from those with high incomes.

Q. Proponents of the tax law say lowering the corporate tax rate from 35 percent to 21 percent will help domestic production and lure companies back to the U.S. What’s your take?

Yale: The lower rate is only one factor. There are many new rules that will affect planning by multinationals, and I think it is too soon to say.

Yin: The impact of the bill on domestic business activity is uncertain. Businesses with offshore opportunities will need to compare the consequences of operating abroad or at home, and the tax rules for both have changed dramatically. Another wild card is how foreign countries will respond to the U.S. tax law changes.