The Tax Cuts and Jobs Act: Preliminary Economic Analysis

Late on Friday, a congressional conference committee released its final report outlining the compromised version of the 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. Cuts and Jobs Act. This bill, if passed by Congress, would lower 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. rates for the next eight years, lower the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. from 35 percent to 21 percent, and move the United States from a worldwide tax systemA worldwide tax system for corporations, as opposed to a territorial tax system, includes foreign-earned income in the domestic tax base. As part of the 2017 Tax Cuts and Jobs Act (TCJA), the United States shifted from worldwide taxation towards territorial taxation. to a territorial tax systemA territorial tax system for corporations, as opposed to a worldwide tax system, excludes profits multinational companies earn in foreign countries from their domestic tax base. As part of the 2017 Tax Cuts and Jobs Act (TCJA), the United States shifted from worldwide taxation towards territorial taxation. .

According to the Tax Foundation’s Taxes and Growth Model, the plan would significantly lower marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. s and the cost of capital, which would lead to a 1.7 percent increase in GDP over the long term, 1.5 percent higher wages, and an additional 339,000 full-time equivalent jobs. In 2018, our model predicts that GDP would be 2.45 percent, compared to baseline growth of 2.01 percent.

The table below summarizes the overall economic effects of this bill.

Economic Impact of the Tax Cuts and Jobs Act

Source: Tax Foundation Taxes and Growth Model, November 2017.
Change in long-run GDP	1.7%
Change in long-run capital stock	4.8%
Change in long-run wage rate	1.5%
Change in long-run full-time equivalent jobs (thousands)	339,000

The Tax Cuts and Jobs Act is a pro-growth tax plan, which, when fully implemented, would spur an additional $600 billion in federal revenues from economic growth from the plan’s permanent provisions. These new revenues would reduce the cost of the plan substantially. Depending on the baseline used to score the plan, current policy or current law, the new revenues could bring the plan closer to revenue neutral. Overall, the plan would decrease federal revenues by $1.47 trillion on a static basis and by $448 billion on a dynamic basis, due to the aforementioned $600 billion in dynamic revenue reflow, expiration of multiple provisions, and the addition of the revenue generated from the functional repeal of the individual mandate.

These results are muted by the temporary nature of many components of the tax package. If the entire plan were enacted permanently, it would increase long-run GDP by 4.7 percent, raise wages by 3.3 percent and create 1.6 million new full-time equivalent jobs. However, the long-run cost of the bill would be $2.7 trillion on a static basis ($1.4 trillion on a dynamic basis) over the next decade.

In 2018, taxpayers’ overall after-tax incomeAfter-tax income is the net amount of income available to invest, save, or consume after federal, state, and withholding taxes have been applied—your disposable income. Companies and, to a lesser extent, individuals, make economic decisions in light of how they can best maximize their earnings. will increase by 1.8 percent, with a 1.6 percent increase in after-tax incomes for the top 1 percent. Over the long run, the plan would lead to -0.3 percent higher after-tax income on average for all taxpayers and -0.2 percent higher after-tax income on average for the top 1 percent in 2027, on a static basis. When accounting for the increased GDP, after-tax incomes of all taxpayers would increase by 1.1 percent in the long run.

A complete report detailing these dynamic results will be available later today.

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