The Senate version of the Tax Cuts and Jobs Act (TCJA) would increase Gross Domestic Product modestly until 2025, and by less after many of its tax cuts expire in that year, according to a new report by the Tax Policy Center. The Senate version of the TCJA would barely change the size of the economy in 2027 or 2037. Those effects are almost identical to those of the Senate Finance Committee’s earlier version of TCJA, which TPC analyzed last week. Because the macroeconomic effects are modest they would have relatively little effect on the estimated revenue impact of the bill.
Using conventional scoring (without macroeconomic effects), the Joint Committee on Taxation (JCT) estimates the Senate bill would increase deficits by over $1.4 trillion from 2018 through 2027, not including added interest costs. After taking into account macroeconomic feedback effects (also excluding interest costs), TPC estimates that the bill would add $1.2 trillion to deficits over the 10 years. Thus, additional economic growth arising from the TCJA would trim the bill’s cost by $186 billion over the decade, or roughly 13 percent.
In the 2028-2037 period, the bill would reduce deficits by about $266 billion before taking into account macroeconomic effects and extra interest. Dynamic scoring shows the bill would reduce deficits by an additional $34 billion, resulting in a net decline in deficits of about $300 billion over the second 10 years. The main reason: lower tax rates on capital income would boost private saving and investment.
Over two decades, TPC forecasts that dynamic effects would raise about $220 billion more than conventional estimates show.
In the short-run, the bill’s tax cuts would increase demand for goods and services by both households and businesses. But partly because the economy is near full-employment, the increase in overall economic output from higher demand would be relatively small.
In the first few years, the bill would also boost the labor supply by cutting marginal income tax rates for most workers. But those benefits would be reversed after nearly all individual income tax provisions expire in 2025. Higher marginal tax rates resulting from the bill’s less generous formula for indexing the tax code for inflation would reduce labor supply in subsequent years.
By cutting corporate income tax rates and temporarily allowing firms to more rapidly depreciate their costs of plant and equipment, the bill would also increase after-tax returns to investment. But its incentives to boost saving and investment would be largely washed out by higher interest rates caused by increased federal deficits over the first decade. Like the House version of the TCJA, the Senate bill would have little effect on the size of the overall US economy over the medium and long-term. This modest effect means that the TCJA would fall far short of paying for itself with robust new revenue.
