Not all tax cuts have the same effect on the U.S. economy. Most analyses of the Tax Cuts and Jobs Act have predicted that the bill will grow the U.S. economy over the next 10 years. But why is this the case?
When analyzing how a tax change will affect the U.S. economy, the most important question to ask is, “What incentives does it create?”
Regarding the Tax Cuts and Jobs Act, certain key parts of the law will increase the incentives of businesses to invest in the United States, which will grow the long-term size of the U.S. economy. Other parts of the law, particularly the provisions that are temporary, will have limited economic effects.
Lecture Highlights
- Tax policy can affect the size of the economy by changing incentives to work and invest.
- The main reason why the Tax Cuts and Jobs Act is expected to grow the economy is the corporate rate cut.
- The temporary provisions in TCJA will have limited economic effects if they are not made permanent.
- The positive economic effects of TCJA will lower the fiscal cost of the law.