Senate Tax Plan Keeps Much Higher Rate on Small Businesses, Lower Rate for Top Earners

The Associated Press
Associated Press/J. Scott Applewhite

Senate Republicans put out their own tax overhaul proposal Thursday that differs in significant ways from the House tax plan.

The Senate plan includes taxing pass-through businesses at a higher rate, delaying the corporate tax cut, and lowering the top rate paid by individuals.

The Senate bill would create a new deduction for pass-through business income, the type earned by many small businesses, partnerships, and sole proprietorships. This deduction would lower the top rate from the current 39.6 percent, according to Senate aides familiar with the matter. The rate would remain above 30 percent, substantially higher than the 25 percent rate included in the House bill.

The Senate bill would also delay a cut in the corporate tax rate until 2019, a year after the House bill would have the tax cut take effect. That is sure to disappoint investors and business leaders who expected the tax cut earlier. It could also be a drag on the economy as businesses hold off on certain activities while they wait for the lower tax rate.

Similar to the House bill, the Senate bill allows for the immediate deduction of capital expenses, business spending on new equipment, but this would expire after 5 years. That’s likely to boost the economy, prompting businesses to spend to take advantage of the break.

The Senate bill will include seven tax brackets instead of the four in the House bill. Highest earners would fall into a new 38.5 percent bracket, lower than the current top rate. The lowest bracket would remain at 10 percent.

Like the House bill, the standard deduction would rise to $12,000 for individuals and $24,000 for married couples. The child tax credit would be increased to $1650, slightly higher than under the House plan.

The Senate bill also restores several deductions whose elimination in the House bill was controversial. It keeps the limit on mortgage interest deductions at $1 million, where the House bill cut that in half. It preserves the adoption tax credit and the medical expense deduction.

The estate tax, which was scheduled for elimination in the House bill, survives in the Senate bill. Instead of ditching the tax, the Senate bill raises the floor below which it does not apply.


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