Now that H.R. 8 (The American TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. payer Relief Act of 2012) has been passed out of both the House and Senate, we can model the full economic and distributional effects of the legislation. (The results we posted yesterday did not include the effects of the estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. changes).
The first set of tables below show the economic and distributional effects of the major tax provisions – increasing the top estate tax rate from 35% to 40%, increasing the top individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. rate from 35% to 39.6%, increasing the capital gains and dividend rates to 20%, and the new PEP and Pease provisions. In this simulation, we did not include the 50% expensing provision because it was not made permanent and, thus, would have no lasting effect on capital accumulation. In the second set of tables below, we do simulate the effects of the 50% expensing provision if it was made permanent.
Table 1 shows that the tax increases will lower GDP by 1.45% compared to the baseline level after about ten years. Wage rates and private business stocks will also fall short of projected levels.
While the tax hikes are projected to raise over $82 billion per year on a static basis, the simulation shows that they will only about $29 billion annually once the economic effects of the taxes are taken into account.
For every new dollar of revenues that the tax hikes are expected to generate, GDP will fall by $8.5.
Table 1: H.R. 8 Tax Provisions(in Billions of 2012 dollars except as noted) |
||
|
GDP |
-1.45% |
|
|
Private business GDP |
-1.52% |
|
|
Private business stocks |
-3.74% |
|
|
Wage rate |
-1.11% |
|
|
Private business hours of work |
-0.42% |
|
|
Federal revenue (dynamic)($ billions) |
$29.30 |
|
|
Federal spending ($ billions) |
-$8.00 |
|
|
Federal deficit (+ = lower deficit) ($ billions) |
$37.30 |
|
|
Static revenue estimate ($ billions) |
$82.30 |
|
|
% Revenue reflow vs. dynamic |
-64.4% |
|
|
$GDP ($ billions) |
-$228.90 |
|
|
$GDP/$tax increase (dollars) |
-$8.50 |
|
|
Weighted Average service price |
Change |
% Change |
|
Corporate |
0.36% |
2.52% |
|
Noncorporate |
0.22% |
1.79% |
|
All business |
0.31% |
2.30% |
Distributional Effects
Table 2 below illustrates the distributional effects of the tax increases. On a static basis, the tax hikes clearly impact only high-earning taxpayers – mostly those earning over $200,000. However, as we saw above, the tax bill not only reduces overall economic growth, but it also reduces investment, wages, and hours worked. When these effects are accounted for in the distribution tables, we see that every income class is impacted. Even taxpayers in the lowest income group will see an after-tax reduction in income of nearly 1.4%.
Table 2: Distributional Effects of H.R. 8 Tax Provisions(in 2012 dollars) |
||||
|
Distribution |
Average after-tax income per return |
|||
|
All Returns |
Static Change |
Static % Change |
Dynamic Change |
Dynamic % Change |
|
< 0 |
-$2 |
0.00% |
$1,395 |
-1.49% |
|
0 – 5,307 |
$0 |
0.00% |
-$40 |
-1.37% |
|
5,307- 10,614 |
$0 |
0.00% |
-$114 |
-1.33% |
|
10,614 – 21,228 |
$0 |
0.00% |
-$219 |
-1.32% |
|
21,228 – 31,842 |
$0 |
0.00% |
-$355 |
-1.35% |
|
31,842 – 42,456 |
$0 |
0.00% |
-$483 |
-1.37% |
|
42,456 – 53,070 |
$0 |
0.00% |
-$595 |
-1.33% |
|
53,070 – 79,606 |
$0 |
0.00% |
-$795 |
-1.32% |
|
79,606 – 106,141 |
$0 |
0.00% |
-$1,094 |
-1.31% |
|
106,141 – 159,211 |
$0 |
0.00% |
-$1,415 |
-1.25% |
|
159,211 – 212,282 |
-$1 |
0.00% |
-$1,983 |
-1.27% |
|
212,282 – 265,352 |
-$4 |
0.00% |
-$2,493 |
-1.26% |
|
262,352 – 530,704 |
-$970 |
0.00% |
-$4,597 |
-1.61% |
|
530,704 – 1,061,408 |
-$15,033 |
-0.02% |
-$22,055 |
-3.95% |
|
> 1,061,408 |
-$154,391 |
-3.67% |
-$190,119 |
-6.99% |
|
TOTAL FOR ALL |
-$446 |
-0.46% |
-$1,125 |
-2.16% |
H.R. 8 Tax Provisions with Permanent Expensing
The next set of tables show the model results for the tax provisions in H.R. 8, but includes the 50% expensing provision as a permanent provision. The simulation shows that if made permanent (which was not in the final bill), the 50% expensing provision would negate most of the economic damage from the other tax provisions by encouraging capital accumulation.
As Table 3 indicates, the tax increases paired with permanent 50% expensing reduces the future level of GDP by 0.11%, far less than the 1.45% without the expensing provision. Wages actually rise slightly compared to baseline levels and the impact on private business stocks is nearly zero.
The expensing provision also makes up for the large dynamic revenue loss expected from the tax provisions alone. The model indicates that such a plan could generate roughly $71 billion in new revenues on a static basis, but about $67 billion after including the economic effects.
Table 3: H.R. 8 Tax Provisions with 50% Permanent Expensing(Billions 2012 dollars except as noted) |
||
|
GDP |
-0.11% |
|
|
Private business GDP |
-0.13% |
|
|
Private business stocks |
-0.09% |
|
|
Wage rate |
0.03% |
|
|
Private business hours of work |
-0.16% |
|
|
Federal revenue (dynamic)($ billions) |
$66.80 |
|
|
Federal spending ($ billions) |
-$0.10 |
|
|
Federal deficit (+ = lower deficit) ($ bil.) |
$66.90 |
|
|
Static revenue estimate ($ billions) |
$70.90 |
|
|
% Revenue reflow vs. dynamic |
-5.80% |
|
|
$GDP ($ billions) |
-$17.30 |
|
|
$GDP/$tax increase (dollars) |
-$0.30 |
|
|
Weighted Average service price |
Change |
% Change |
|
Corporate |
-0.06% |
-0.44% |
|
Noncorporate |
0.11% |
0.90% |
|
All business |
-0.01% |
-0.04% |
Distributional Effects
Table 4 shows the distributional effects of H.R. 8 with permanent expensing. Again, most of the static effects of the tax increase fall on high-earners, with all income groups feeling the pinch on after-tax wages when we account for the broader economic effects. However, the impact on low-income taxpayers’ pocketbooks is -0.10%, compared to -1.37% without expensing.
Table 4: Distributional Effects of H.R. 8 Tax Provisions with 50% Permanent Expensing(2012 dollars) |
||||
|
Distribution |
Average after-tax income per return |
|||
|
All Returns |
Static Change |
Static % Change |
Dynamic Change |
Dynamic % Change |
|
< 0 |
-$2 |
n.a. |
$116 |
n.a. |
|
0 – 5,307 |
$0 |
0.00% |
-$3 |
-0.09% |
|
5,307- 10,614 |
$0 |
0.00% |
-$8 |
-0.10% |
|
10,614 – 21,228 |
$0 |
0.00% |
-$16 |
-0.10% |
|
21,228 – 31,842 |
$0 |
0.00% |
-$25 |
-0.10% |
|
31,842 – 42,456 |
$0 |
0.00% |
-$34 |
-0.10% |
|
42,456 – 53,070 |
$0 |
0.00% |
-$42 |
-0.09% |
|
53,070 – 79,606 |
$0 |
0.00% |
-$57 |
-0.09% |
|
79,606 – 106,141 |
$0 |
0.00% |
-$78 |
-0.09% |
|
106,141 – 159,211 |
$0 |
0.00% |
-$102 |
-0.09% |
|
159,211 – 212,282 |
-$1 |
0.00% |
-$145 |
-0.09% |
|
212,282 – 265,352 |
-$4 |
0.00% |
-$188 |
-0.10% |
|
262,352 – 530,704 |
-$970 |
0.00% |
-$1,242 |
-0.43% |
|
530,704 – 1,061,408 |
-$15,033 |
-0.02% |
-$15,572 |
-2.79% |
|
> 1,061,408 |
-$154,391 |
-3.67% |
-$157,236 |
-5.78% |
|
TOTAL FOR ALL |
-$446 |
-0.46% |
-$496 |
-0.95% |
Notes: The model is run at 2008 income levels, then inflated to 2012 dollars.
Share