The House-passed version of the Tax Cuts and Jobs Act would spark an initial boost in economic growth that would reduce the bill’s revenue cost by $169 billion in its first decade, according to November 20 estimates from the Urban-Brookings Tax Policy Center.
That additional revenue would come from an early 0.6 percent boost to GDP in 2018, but the positive growth effect would dwindle over time to 0.3 percent in 2027 and 0.2 percent in 2037. In its second decade, economic growth from the bill would trim the bill’s cost by $136 billion, the Tax Policy Center (TPC) estimated.
The nonpartisan group found that the bill would boost demand largely by reducing individual income tax rates for most households, which would give those households more money to spend, and by temporarily allowing full expensing for businesses. Those income tax rate cuts would also boost labor supply, “mostly by encouraging lower-earning spouses to enter the workforce or work additional hours,” TPC said.
The bill’s corporate income tax rate cut and the temporary expensing provision would also significantly increase saving and investment, the analysis found.
According to TPC, however, many of these positive economic effects would be largely diminished over time. In the case of the individual income tax cuts, TPC found that most of those tax cuts accrue to higher-income taxpayers, “who spend a smaller share of any increases in after-tax income than lower-income households,” thus lessening the overall demand effect.
Likewise, because the United States is already near full employment, “the impact of increased demand on output would be smaller and diminish more quickly than it would if the economy were currently in recession,” TPC said.
Further, the analysis found that because the bill would substantially increase the deficit, interest rates would increase, thus decreasing incentives to invest. The rising interest rates “would eventually negate the incentive effects of lower tax rates on capital income and decrease investment below baseline levels in later years,” the analysis said, although it noted that that negative effect could be forestalled if the budget deficits are offset by spending cuts.
That scenario, in which a deficit-increasing tax cut is later offset by spending cuts, is one envisioned by Senate Finance Committee ranking minority member Ron Wyden, D-Ore., who warned in a November 20 statement that Republican lawmakers will support a deficit increase now and then “come flying back to cut Medicare and Medicaid once the deficits from their tax bill pile up.”
TPC’s growth projections fall far short of what many Republicans claim their bill will achieve. Top Trump administration officials have maintained that they believe that the proposed $1.5 trillion in tax cuts would largely or entirely be offset by revenue from increased economic growth.
The previous week, a dynamic score from the Tax Foundation of the House bill found that growth would reduce the cost of the bill by $908 billion over a decade, and lead to 3.5 percent higher GDP. However, the Tax Foundation also scored the bill as losing $1.98 trillion over a decade on a static basis, so the bill was still scored as losing over a trillion dollars.
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