Participants at a May 23 event on the effects of the Tax Cuts and Jobs Act (TCJA) on economic growth broadly agreed that the 2017 tax law falls short of ideal reform because it increased the federal debt and is likely to have only a relatively modest impact on long-run economic growth.
The conference, cosponsored by the Tax Policy Center and Northwestern’s Kellogg School of Management, highlighted several concerns. Keynote speaker Jason Furman, Harvard Kennedy School Professor of Practice, and Kellogg Visiting Associate Professor Ben Harris both emphasized that the reduction in federal revenues due to TCJA is especially problematic because even under prior law revenues fell far short of projected spending. Increased federal budget deficits may also limit the ability of government to respond to a future recession or other crisis. However, these speakers noted that the revenue shortfall and the scheduled expiration of many provisions in TCJA ensure that the tax code will have to be amended again in coming years, offering opportunities for Congress to improve it.
All the participating speakers agreed that better-targeted reforms could produce greater incentives for economic growth at a lower revenue cost. In particular, provisions such as full first-year expensing of capital investment—which gives a tax break only to new investment—would provide a more cost-effective investment incentive than the TCJA’s 35 percent to 21 percent reduction in the corporate tax rate—which largely benefits investment that has already occurred. (The TCJA allows expensing for certain types of investment, but that provision is temporary).
Combining revenue-losing investment incentives with expanding the tax base would also allow for pro-growth policies with less loss in revenues. For example, Aparna Mathur, Resident Scholar in Economic Policy Studies at the American Enterprise Institute, suggested that pairing reduced business taxes with a carbon tax could limit both revenue losses and harmful emissions. And making tax rates more uniform across different types of income could both boost efficiency and enhance compliance with the tax code. The TCJA, by contrast, did little to eliminate tax preferences and, in many areas, increased the variation in tax rates among different sources of income.
All in all, panelists argued that while the TCJA may grow the economy modestly, significant opportunities remain both in terms of increasing revenues to better match desired spending and improving the efficiency of the tax code.
