Featured Articles

TPC’s Dynamic Score Shows Diminishing Return on Senate’s Tax Cuts

Posted on December 4, 2017 by Jonathan Curry

The Senate tax reform bill would grow the economy by $141 billion in its first year, but by 2027, the economy would be only $6 billion larger than it would otherwise, according to a December 1 dynamic analysis from the Urban-Brookings Tax Policy Center (TPC).

The economic growth effects of the tax cuts start to dwindle in the second year, dropping a tenth of a percent to 0.6 percent over the GDP baseline in 2019, the analysis states. It drops sharply after 2025, going from 0.5 percent to 0.1 percent in 2026, before almost completely zeroing out in 2027. TPC attributes this outcome largely to the expiration of most individual income tax changes. By the end of the second decade in 2037, GDP would be only 0.1 percent higher than it otherwise would have been, TPC estimates.

TPC’s analysis found that the macroeconomic growth would reduce the bill’s deficit impact by $179 billion, bringing the bill’s 10-year deficit cost to $1.23 trillion. The analysis is based on the version of the Tax Cuts and Jobs Act passed by the Senate Finance Committee on November 16. The Senate passed a substitute amendment to the bill early December 2 that included some significant changes.

Although the Senate legislation does spell out expiration dates for almost all of its individual income tax provisions, top Republicans have made clear that those sunsets were only included to help the bill comply with Senate procedural rules.

The lead author of TPC’s report, Benjamin R. Page, told Tax Analysts that if the individual cuts are extended, he would not expect the sharp drop-off forecast for 2025. But, he added, in the long run, the positive growth effect would start to turn negative as higher federal deficits produce drag on the economy. 

And while some Republicans have said their objective is a bill that achieves a 0.4 percent GDP growth rate, Page cautioned that there’s a key difference between growth rates and growth levels. He explained that, according to TPC’s dynamic analysis, the Senate bill falls far short of the Republicans’ objective.

“It’s just an unfortunate coincidence that the numbers are similar to the growth effect percent numbers bandied about,” Page said. He explained that to achieve a 0.4 percent growth rate, the GDP levels in each year would need to be about 0.4 percent higher than the previous one; so instead of less than 0.1 percent economic growth in 2027, Republicans would be looking for a higher GDP level of 4.0 percent in that year.

TPC’s analysis is somewhat less rosy than a dynamic estimate of the Senate bill by the Joint Committee on Taxation released the day before. The JCT projected that the bill would grow the economy by 0.8 percent over a decade and yield $458 billion more in revenue compared to TPC’s $179 billion estimate.

TPC’s report on the Senate bill was the group’s first such analysis since it examined the House-passed version November 20. TPC dynamically scored the House version as producing 0.6 percent higher GDP in 2018, and 0.3 percent higher GDP by the end of the 10-year period. That would have reduced the bill’s 10-year revenue loss by $169 billion. Notably, TPC’s analysis of the House bill does not include the same drop-off effect because the House bill doesn’t sunset its individual income tax provisions. 

“There’s differences at the margin, but on broad outlines, they’re very similar” bills, Page noted. 

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