The Economic Impact of the 2016 House Republicans’ Tax Reform Plan

July 5, 2016

The Economic Impact of the 2016 House Republicans' Tax Reform Plan

Analysis Details the Impact on Revenue, GDP, and After-Tax Income

Washington, DC (July 5, 2016)—In June, the House Republicans released a tax reform “blueprint” that would make substantial changes to the U.S. individual and business tax systems.

Today, the nonpartisan Tax Foundation released a summary of what is included in the plan and a detailed analysis of how the plan would affect revenue, wages, GDP, and after-tax incomes for each income quintile.

“This plan is an interesting contribution to the tax debate because it stands in contrast to many of the proposals from Republican presidential candidates earlier this year. It’s a smaller tax cut than some of the other plans we’ve seen, but still increases GDP by 9.1 percent over ten years,” said Kyle Pomerleau, Director of Federal Projects at the Tax Foundation. “There are provisions that people on both sides of the aisle will like and dislike, and it will be interesting to see how they respond.”

The report’s key findings include:

  • The plan would significantly reduce marginal tax rates and the cost of capital, which would lead to 9.1 percent higher GDP over the long term, 7.7 percent higher wages, and an additional 1.7 million full-time equivalent jobs.
  • The plan would reduce federal revenue by $2.4 trillion over the first decade on a static basis. However, after accounting for the larger economy and broader tax base that would result from the reforms, the plan would reduce revenue by $191 billion over the first decade.
  • Although the plan would reduce federal revenue by $2.4 trillion on a static basis in the first decade, much of the revenue loss is one-time. As a result, the plan will cost much less in subsequent decades.
  • On a static basis, the plan would lead to 0.7 percent higher after-tax income for all taxpayers and 5.3 percent higher after-tax income for the top 1 percent. When accounting for the increased GDP, after-tax incomes of all taxpayers would increase by at least 8.4 percent.

In terms of what is included, the plan seeks to reform the individual income tax code by lowering marginal tax rates on wage, investment, and business income; broadening the tax base; and simplifying the tax code. The plan would also lower the corporate income tax rate to 20 percent and convert it into a destination-based cash-flow tax. Finally, the plan would eliminate federal estate and gift taxes. The report includes full details on what provisions are included.

“This plan comes close to being revenue neutral, but not for the reasons one might think,” added Pomerleau. “Some people think that all tax cuts pay for themselves, but this is simply not the case. In this plan, the tax cuts spur economic growth, but the cuts only result in 32% of the plan’s dynamic revenue. The rest comes from substantial base-broadening provisions. This is a good example of how there are no silver bullets in tax reform. Unless policymakers want a substantial deficit, they need to rely on more than economic growth to produce enough revenue. They also need to consider other means of raising revenue, such as base-broadeners.”

Full report: Details and Analysis of the 2016 House Republican Tax Reform Plan

Media Contact:
Richard Borean
Manager of Communications
Tax Foundation
202-464-5120
borean@taxfoundation.org

The Tax Foundation is the nation’s leading independent tax policy research organization. Since 1937, our principled research, insightful analysis, and engaged experts have informed smarter tax policy at the federal, state, and local levels.

###

The Tax Foundation is the nation’s leading independent tax policy research organization. Since 1937, our principled research, insightful analysis, and engaged experts have informed smarter tax policy at the federal, state, and local levels.