As Congress debates next steps on 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. provisions in the Build Back Better Act proposed in the House of Representatives, it is important to consider the economic impacts, which include reduced economic output, wages, and jobs. Due to the plan’s economically costly and inefficient tax increases, we find that long-run GDP would drop by a little over $1 for every $1 in new tax revenue.
Using Tax Foundation’s General Equilibrium Model, we estimate that the Ways and Means tax plan would reduce long-run GDP by about 0.4 percent, which in today’s dollars amounts to about $129 billion of lost output annually. We estimate the tax changes in the plan (including IRS enforcement and excluding other non-tax revenue raisers like drug pricing) would raise about $124 billion annually in new tax revenue in the long run, conventionally estimated in today’s dollars, meaning for every $1 in revenue raised, economic output would fall by about $1.04.
When the model accounts for the smaller economy, it estimates that the plan’s dynamic effects would reduce expected new tax collections to be about $104 billion annually over the long run (also in today’s dollars), meaning for every $1 in revenue raised, economic output would fall by about $1.24.
|Long-run Gross Domestic Product (GDP)||-0.38%|
|Long-run Gross National Product (GNP)||-0.37%|
|Full-Time Equivalent Jobs||-107,000|
Source: Tax Foundation General Equilibrium Model, November 2021.
Focusing on the House Build Back Better Tax Plan’s Effects Within the 10-Year Budget Window
The tax plan’s effects on GDP and revenue would build up over several years to reach the long-run equilibrium, with a majority of the adjustment occurring within the 10-year budget window (2022-2031). Starting with a 0.05 percent drop in GDP in the first year (about $11 billion) and building to a 0.26 percent drop in GDP by 2031 (about $86 billion), the plan would result in a cumulative GDP loss of about $531 billion from 2022 through 2031, as shown in the accompanying chart.
The $531 billion in lost GDP is worth about 70 percent of the revenue the plan would raise through tax changes on a conventional basis over the same 10 years (about $756 billion) and about 88 percent of the revenue the tax plan would raise on a dynamic basis (about $603 billion) after accounting for the smaller economy. In other words, for every $1 raised over the next decade, about $0.88 is lost in economic output. The 10-year ratio is smaller than the long-run ratio, because over the first 10 years, the economic impact is still phasing in.
The adjustment path for GDP over the 10-year window is based on the time it takes to turn over the capital stock. By the 10th year, the economy has felt about 60 percent of the long-run impact of the tax changes.
This process may happen faster if labor and capital adjust more quickly than we have assumed. For example, if we assume 90 percent of the long-run GDP impact is felt in the first 10 years, then the cumulative GDP loss resulting from the plan would amount to $711 billion over the budget window.
|2022-2031 Cumulative Budget Window||Long-run Annual (2021 Dollars)|
|Conventional Revenue from Tax Provisions||$756.7 billion||$124.4 billion|
|Dynamic Revenue from Tax Provisions||$603.1 billion||$104.3 billion|
|GDP||-$530.5 billion||-$128.9 billion|
Source: Tax Foundation General Equilibrium Model, November 2021. Note: The revenue estimate excludes $250 billion in projected revenue from drug pricing proposals and the economic impact of $120 billion in revenue from tax enforcement and $147 billion in unscored business tax provisions estimated by the Joint Committee on Taxation (JCT).
Visualizing the House Build Back Better Tax Plan’s Effects on Individual Taxpayers
The House Build Back Better tax plan reduces economic output by reducing the after-tax return to investment opportunities for firms and the incentive to work through higher tax rates on labor income. About 25 percent of the plan’s economic impact is due to increasing the tax burden on corporations, which is the most economically costly way to raise revenue.
The Organisation for Economic Co-operation and Development (OECD) found that 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. is the most harmful tax for economic growth, and academic research suggests that workers, especially low-skilled, women, and the young, are negatively impacted through lower wages.
Even before accounting for a smaller economy, taxpayers earning less than $400,000 would see lower 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 after-tax income. s due to higher corporate taxes and higher taxes levied on nicotine.
We can visualize how the economic harm of the tax plan impacts after-tax incomes by comparing the conventional distributional impact of the tax changes, which holds the size of the economy constant, to the dynamic distributional effect that includes the impact of a smaller economy on incomes. The following table shows the average change in after-tax income per filer for each income quintile.
Overall, the plan would reduce average after-tax income per filer by $464 in 2031, on a conventional basis, and by $469 per filer in the long run on a dynamic basis.
The economic harm caused by the tax increases would claw back some of the plan’s permanent full refundability of the child tax credit (CTC)The federal child tax credit (CTC) is a partially refundable credit that allows low- and moderate-income families to reduce their tax liability dollar-for-dollar by up to ,000 for each qualifying child. The credit phases out depending on the modified adjusted gross income amounts for single filers or joint filers. aimed at low- and middle-income families. For taxpayers in the bottom 20 percent, it would reduce the average net benefit of the plan per filer from $54 to $7, nearly wiping out the average benefit per filer.
Before accounting for economic effects, filers in the middle quintile would see a decrease in average after-tax income of about $5—mostly due to the business tax increases—but that would rise to a $184 drop in average after-tax income every year when including the negative economic effects. The top quintile would see a $2,406 drop in average after-tax income, driven by the $10,000 SALT cap in 2031, business tax increases, and the surcharge on high-income earners. In the long run, the top quintile’s drop in average after-tax income falls to $1,829 on a dynamic basis after the $10,000 SALT cap expires at the end of 2031.
|Quintile||AGI Thresholds in 2022||Average Conventional Change in After-tax Income, 2031 (2022 dollars)||Conventional Percentage Change in After-tax Income, 2031||Average Dynamic Change in After-tax Income, Long-run (2022 dollars)||Dynamic Percentage Change in After-tax Income, Long-run|
|0% to 20%||$0 to $19,500||$54||0.6%||$7||0.1%|
|20% to 40%||$19,500 to $33,100||$12||0.1%||-$107||-0.5%|
|40% to 60%||$33,100 to $50,229||Less than $5||Less than -0.05%||-$184||-0.5%|
|60% to 80%||$50,229 to $80,150||-$37||-0.1%||-$297||-0.5%|
|80% to 100%||$80,150 and above||-$2,406||-1.5%||-$1,829||-1.1%|
Source: Tax Foundation General Equilibrium Model, November 2021.
Note: This post was originally published on September 22nd, but has been updated on November 11th to reflect the recent proposals in the Build Back Better framework.