The cornerstone of the tax bill, the change that's permanent and enduring and that even a future Democratic administration is unlikely to fully reverse, is its reduction of the corporate income tax rate from 35 percent to 20 percent.
This fulfills a longstanding demand of corporate executives and lobbyists, who complain that the statutory corporate tax rate charged in the US is higher than in peer countries; indeed, it's the highest in the OECD grouping of rich developed nations. Our high rate, however, is offset by copious tax breaks and the ease with which the US allows companies to move profits to tax havens overseas, which means that the effective rate US corporations pay isn't much different from that companies in other rich countries pay. The effective tax rate paid on profits from new investments in the US was about 24 percent in 2014.
A longstanding goal of both Democratic and Republican politicians has been to bring the statutory rate down from 35 percent by closing tax breaks in the corporate code. In theory, it should be possible to get the statutory rate closer to the 24 percent effective rate that way. The Obama administration had a plan for revenue-raising corporate tax reform with a tax rate of 28 percent, though it didn't specify many tax breaks it wanted to close to pay for that.
Republicans in Congress and the Trump administration, by contrast, have opted for a 20 percent rate, lower than the effective rate, all but ensuring that overall taxes on corporations will be lowered. They also haven't closed many tax breaks; they continue to let businesses deduct some of the interest they pay on loans, and don't touch the large research and development tax credit, or the credit for low-income housing developers.
They make it easier for companies to move profits overseas by adopting a territorial system where profits earned abroad are taxed at a lower rate, and sometimes not taxed at all. They also offer a much lower rate for companies that decide to bring back profits currently parked overseas; this corporate tax "holiday" encourages future tax evasion by setting a precedent that evasion will be rewarded with special breaks to bring the money back.
And Republicans add a big new tax deduction for corporations by, for five years, letting companies deduct the full value of their investments. A lot of economists like this provision and think it's good for growth. But it costs a substantial amount of money.
How do Republicans pay for all this? In the short-run, they don't, and just add $1 trillion or more to the federal debt. In the long-run, they raise taxes on individuals and limit health care aid through ending Obamacare's individual mandate. After ten years, the bill is basically a tax hike on individuals, particularly poorer individuals getting Medicaid or insurance subsidies, to pay for corporate cuts.
And even companies that don't pay the corporate income tax benefit. The bill is set to add a deduction (initially set at 17.5 percent, reportedly now increased to 20 percent) for pass-through income, money that company owners earn from firms like partnerships and LLCs and S-corporations that are exempt from corporate taxes. Pass-through companies already face substantially lower taxes than bigger "C-corporations," which pay the corporate tax as well as individual income taxes when they return dividends to shareholders. But they've lobbied successfully to get an additional break as C-corps see their taxes slashed.
And here's the thing: Democrats won't reverse all of this if they take power in the future. They'll reverse some of it, for sure. But recall that Obama wanted a 28 percent corporate tax rate. No one wants to go back to 35 percent. Even if the bill is largely reversed, it will leave a lasting legacy in the form of a lower corporate rate, which will be tough to dislodge given DC's bipartisan passion for low corporate tax rates.