Donald Trump finally had his signature legislative achievement.
After nearly a year in office marked by the collapse of Republican efforts to repeal the Affordable Care Act, Trump sat in the Oval Office on December 22, 2017, and signed the Tax Cuts and Jobs Act.
The legislation rewrote large portions of the American tax code.
Trump and congressional Republicans promoted it as a tax cut for American families that would encourage investment, raise wages and make American companies more competitive.
But the structure of the legislation also revealed where Republicans had placed some of their biggest priorities.
The law permanently slashed the federal corporate income-tax rate from a top statutory rate of 35 percent to 21 percent.
Many of its individual income-tax provisions, meanwhile, were written to expire after 2025.
The law also weakened the Affordable Care Act by reducing its individual-mandate penalty to zero beginning in 2019.
And according to official congressional estimates at the time, the package would substantially increase federal deficits over the following decade.
Trump called it a victory for American workers.
Critics saw something else: an enormous corporate tax reduction packaged alongside temporary benefits for individuals and financed in significant part through additional federal borrowing.
Trump's Biggest Legislative Victory
Trump entered office with Republicans controlling both houses of Congress.
The expectation was that the new administration would quickly begin passing major conservative legislation.
Instead, Republicans spent much of 2017 struggling.
Their attempt to repeal and replace Obamacare collapsed dramatically in the Senate.
Other major campaign promises remained unfinished.
Tax legislation became the administration's opportunity to end Trump's first year with a major legislative accomplishment.
Republicans moved quickly.
The House passed its original tax bill in November.
The Senate passed its version in early December.
Republican negotiators then produced a compromise bill.
No Democratic senator voted for the final legislation.
Trump signed it three days before Christmas.
“I promised the American people a big, beautiful tax cut for Christmas,” Trump had said after Congress completed its work.
He now had it.
The Corporate Tax Rate Plunges
The centerpiece of the business provisions was enormous.
Before the legislation, the top statutory federal corporate income-tax rate was 35 percent.
Trump's law replaced the graduated corporate rate structure with a single 21 percent rate beginning in 2018.
And unlike many of the individual provisions, the corporate rate reduction was permanent under the law as enacted.
Republicans argued that the previous corporate tax system discouraged companies from investing in the United States.
Reducing the rate, they said, would encourage businesses to invest, expand, hire employees and increase wages.
Trump made expansive predictions about what would follow.
Companies would return to the United States.
Factories would reopen.
Investment would increase.
Workers would benefit.
The administration portrayed the corporate tax cut not simply as assistance to businesses but as an economic strategy intended eventually to benefit employees and consumers as well.
Critics questioned how much of the benefit would actually reach workers rather than shareholders and business owners.
That debate would continue long after Trump signed the bill.
Individuals Got Tax Cuts Too — But With an Expiration Date
The law did reduce taxes for many individual taxpayers.
It lowered individual income-tax rates.
It nearly doubled the standard deduction.
It doubled the maximum Child Tax Credit from $1,000 to $2,000.
It substantially increased the income thresholds at which the Alternative Minimum Tax affected taxpayers.
Those were significant changes.
But there was an important difference between the individual and corporate portions of the legislation.
Many of the individual tax provisions were scheduled to expire after December 31, 2025.
The 21 percent corporate rate was not.
That structure was partly a consequence of the budget rules Republicans used to pass the legislation.
Making all of the individual reductions permanent would have increased the bill's projected cost beyond the constraints under which Congress was operating.
So lawmakers made many of them temporary.
The result created one of the most politically potent criticisms of the law:
Corporations received a permanent rate reduction.
Families received numerous provisions with expiration dates.
Not Every Taxpayer Benefited the Same Way
The legislation was far more complicated than simply lowering tax rates.
While it increased the standard deduction, it also eliminated personal exemptions.
It placed a $10,000 cap on the deduction for state and local taxes, commonly known as SALT.
It limited the mortgage-interest deduction for certain new mortgages.
It created a new deduction for many owners of pass-through businesses.
It increased the estate-tax exemption.
It changed the way multinational corporations were taxed on foreign income.
The effect on an individual household therefore depended on income, family size, deductions, where the taxpayer lived and other circumstances.
Many households received tax reductions.
Some did not.
And the benefits were not evenly distributed.
Later analysis by the Congressional Budget Office found that the overall tax reductions produced by the 2017 law in 2018 were greatest among households in the highest income quintile.
That did not mean middle-income households received nothing.
Many received tax cuts.
But the law's largest aggregate benefits were concentrated higher in the income distribution.
The Estate Tax Shrinks
Trump also celebrated changes to the federal estate tax.
The legislation roughly doubled the amount of wealth that could be transferred before the estate tax applied.
Trump frequently promoted the change as protection for family farms and small businesses.
At the signing ceremony, he argued that families would be able to keep farms and businesses rather than lose them because of estate taxes.
The provision unquestionably reduced the number of estates potentially subject to the tax.
But the estate tax already applied to only a small fraction of estates because millions of dollars could already be transferred before the tax became applicable.
Doubling the exemption therefore primarily benefited households with substantial accumulated wealth.
It was another provision critics pointed to when arguing that the legislation disproportionately benefited affluent Americans.
Obamacare Takes Another Hit
Republicans had failed to repeal the Affordable Care Act earlier that year.
The tax bill nevertheless accomplished one of their major health-care objectives.
The ACA required most Americans to obtain health insurance or potentially pay a tax penalty.
The Tax Cuts and Jobs Act reduced that penalty to zero beginning in 2019.
Technically, the statutory coverage requirement remained.
Its financial enforcement mechanism effectively disappeared.
This mattered beyond taxes.
The individual mandate had been designed to encourage healthier people to remain in the insurance market alongside people requiring more medical care.
The Congressional Budget Office expected eliminating the penalty to reduce insurance enrollment and increase premiums in the individual insurance market relative to what otherwise would have occurred.
Republicans had failed to repeal Obamacare.
But through the tax bill, they had removed one of its central mechanisms.
What About the Deficit?
For years, Republicans had presented themselves as the party of fiscal restraint.
The Tax Cuts and Jobs Act created an uncomfortable contradiction.
The tax cuts reduced federal revenue substantially.
At enactment, the Congressional Budget Office and Joint Committee on Taxation estimated that the legislation would reduce federal revenues by roughly $1.65 trillion and reduce federal outlays by about $194 billion during the 2018–2027 period.
The net effect was approximately $1.46 trillion in additional deficits over that period before accounting for macroeconomic feedback.
Republicans argued that stronger economic growth would offset part of the cost.
Lower taxes would stimulate investment.
Investment would increase productivity.
Greater productivity would raise wages and economic output.
A larger economy would produce additional tax revenue.
The question was whether those effects would be large enough to compensate for the revenue lost through the tax cuts.
Official estimates did not assume that the legislation would completely pay for itself.
Trump nevertheless promoted the package as an economic engine.
“Rocket Fuel”
Trump described the legislation in characteristically dramatic terms.
Tax reform, he said, would pour “rocket fuel” into the American economy.
The White House predicted that reducing corporate taxes would make the United States substantially more competitive internationally.
There was a legitimate economic argument behind the corporate-rate reduction.
The United States' 35 percent statutory federal corporate rate was high compared with rates in many other developed countries.
Economists across the political spectrum had discussed corporate tax reform long before Trump entered office.
But lowering the rate to 21 percent represented an enormous reduction.
And how the resulting gains would be distributed remained contested.
The administration argued that workers would ultimately benefit through greater investment and higher wages.
Critics expected a substantial portion of the benefits to flow to shareholders.
The Law Changed International Corporate Taxes Too
The corporate rate reduction attracted most of the attention, but the legislation also fundamentally changed how the United States taxed multinational corporations.
The old system generally taxed U.S. corporations on worldwide income while allowing taxes on much foreign income to be deferred until profits were brought back to the United States.
That had encouraged American multinational companies to accumulate enormous amounts of earnings overseas.
The new law moved the United States toward a more territorial system while creating new taxes and anti-abuse provisions governing foreign earnings.
It also imposed a one-time tax on previously accumulated foreign profits.
Supporters argued that the changes removed incentives for American corporations to keep money offshore.
Critics warned that the complicated new international rules could create different opportunities for tax planning and profit shifting.
This was not simply a tax-rate reduction.
It was a major restructuring of American corporate taxation.
Trump Gets the Victory He Needed
Politically, however, the details mattered less than the achievement.
Trump had finally signed a major piece of legislation.
Republicans had failed spectacularly on health care.
The border wall had not been built.
Major infrastructure legislation had not materialized.
But tax cuts were something Republicans broadly agreed upon.
The party controlled Congress.
Trump controlled the White House.
And this time they delivered.
The president had something tangible to show supporters at the end of his first year.
Who Benefited Became the Central Argument
The political battle over the Tax Cuts and Jobs Act ultimately centered on a deceptively simple question:
Who was the law really for?
Republicans could point to genuine tax reductions for millions of households.
The standard deduction increased.
The Child Tax Credit expanded.
Individual tax rates fell.
Businesses received incentives for investment.
The corporate tax system became more internationally competitive.
Critics could point to a different set of facts.
The corporate rate fell dramatically and permanently.
Many individual provisions were temporary.
The estate-tax exemption increased substantially.
The legislation was projected to increase federal deficits.
And subsequent distributional analysis showed the largest overall tax reductions flowing to households at the upper end of the income distribution.
Both sets of facts were part of the same law.
A Different Kind of Trump Legacy
The Tax Cuts and Jobs Act did not generate the daily spectacle of Trump's rallies, tweets or political confrontations.
But in terms of lasting policy, it was one of the most important acts of his first presidency.
It reshaped corporate taxation.
It changed individual taxes.
It weakened an important component of Obamacare.
It altered international tax rules.
It limited deductions used by millions of taxpayers.
And it committed the federal government to substantially lower corporate tax revenues than it would otherwise have collected.
Trump called it a Christmas present for the American people.
For many Americans, it did reduce their taxes.
For corporations, however, the legislation offered something considerably more durable.
Their top statutory federal income-tax rate fell from 35 percent to 21 percent.
Permanently.
Many of the individual tax cuts came with an expiration date.
And the federal government was projected to borrow substantially more money as a result.
That was the bargain Donald Trump signed into law on December 22, 2017 — and it became the largest legislative accomplishment of his first year in office.