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Tax Bill’s Distributional, Economic Effects Hinge on Promises

Posted on December 19, 2017 by Jonathan Curry

Early analyses of the conference committee bill by policy groups around Washington suggest that measuring the bill’s economic and distributional effects depends on whether Republicans should be taken at their word.

A December 18 distributional analysis of the conference committee’s version of the Tax Cuts and Jobs Act by the Urban-Brookings Tax Policy Center (TPC) found that while all income groups and almost all taxpayers would receive a tax cut in 2018 — a 2.2 percent cut on average — that tax cut disappears and, in some cases, turns into a tax increase for a more than half of all taxpayers by the end of the decade.

The 2027 tax hike can be almost entirely attributed to the bill’s inclusion of a swath of provisions that come with sunset dates, included primarily to satisfy the requirements of the Senate’s Byrd Rule. According to the TPC report, in 2025, the year before the individual income tax provisions expire, only 9 percent of taxpayers will face a tax increase, up from only 5 percent in 2018. But after the sunsets take effect, the share of taxpayers paying more in taxes spikes to 53 percent.

An analysis by the Tax Foundation released that same day had similar findings, noting that while after-tax incomes for all income groups would receive, on average, a 1.8 percent boost in 2018, by 2027, taxpayers’ after-tax incomes would drop by 0.3 percent. Still, according to the Tax Foundation, macroeconomic feedback would offset most of that tax increase so that taxpayers would still wind up with an average 1.1 percent increase in after-tax income.image

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The TPC report did not model the distributional impact of additional economic growth, although its analyses of earlier versions of the tax bill, which found miniscule growth impact, suggest there would be little, if any, change.

And according to a Joint Committee on Taxation distributional analysis (JCX-68-17) also released December 18, an across the board tax cut across for income levels in 2019 steadily reverses over time.

 

As early as 2021, the updated Tax Cuts and Jobs Act would result in a net tax increase for households earning between $20,000 and $30,000 annually. By 2027, all households earning less than $75,000 annually would see their taxes increased, and those earning more would still mostly see a small tax decrease less than one percent.

However, if Republicans are to be believed, the 2027 individual income tax hikes are unlikely to actually materialize. Commenting on the new analyses, House Ways and Means Committee Chair Kevin Brady, R-Texas, once again predicted that lawmakers won’t have the guts to allow the tax increases to go into effect.

“How about we try eight years of you spending your money, and then a future Congress will decide what works best for the country. I’m convinced they’ll decide growth and a far more competitive tax code means continuing those permanently,” Brady told reporters.

As it happens, the Tax Foundation modeled the results of the scenario envisioned by Brady and other top Republicans in their analysis. Assuming the individual and other expiring tax provisions are made permanent, taxpayers could expect to see their after-tax incomes increase in 2027 by, on average, 1.9 percent on a static basis or 6.5 percent on a dynamic basis.

Bigger Growth, Bigger Deficits

Just as assuming temporary provisions become permanent has a substantial effect on individuals’ after-tax incomes, the Tax Foundation analysis suggests it could have a striking effect on the overall economy.

Modeled as written, the bill would grow the economy by 1.7 percent over 10 years, boost wages by 1.5 percent, and yield an additional 339,000 jobs, according to the analysis. This additional growth would produce $600 billion more in federal revenue, to help offset the $1.47 trillion static cost of the bill.

But assuming the bill’s expiring provisions are made permanent, the Tax Foundation projects a much more robust economic effect. In the permanent scenario, the economy would grow by 4.7 percent over a decade, wages would increase by 3.3 percent, and more than 1.6 million jobs would be created.

While a bill without sunsets might promote greater growth, the Committee for a Responsible Federal Budget (CRFB) also found that it would balloon the federal deficit.

In addition to the expiring individual income tax provisions, the CRFB noted in a December 18 blog post that there are other provisions with sunsets or delayed phase-in dates that they view as unlikely to materialize, such as requiring research and experimentation expenses to be amortized beginning in 2022.

Combined, those provisions add between $570 billion and $725 billion in potential budgetary “gimmicks,” bringing the true 10-year cost of the bill to between $2 trillion and $2.2 trillion on a static basis or, using JCT’s dynamic score as a model, $1.6 trillion to $1.7 trillion after including macroeconomic feedback.

Dylan Moroses and Zoe Sagalow contributed to this article.

Follow Jonathan Curry (@jtcurry005) on Twitter for real-time updates.