Preliminary Details and Analysis of the Tax Cuts and Jobs Act

Key Findings

• 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 would reform both individual income and corporate income taxes and would move the United States to a territorial system of business taxation.
• According to the Tax Foundation’s Taxes and Growth Model, the plan would significantly lower marginal tax rates 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.
• The Tax Cuts and Jobs Act is a pro-growth tax plan, which would spur an additional $1 trillion in federal revenues from economic growth, with approximately $600 billion coming from the bill’s permanent provisions and approximately $400 billion from the bill’s temporary provisions over the budget window. 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.
• Over the next decade, the Tax Cuts and Jobs Act would increase GDP by an average of 0.29 percent per year; GDP growth would be, on average, 2.13 percent, compared to 1.84 percent. In 2018, GDP growth would be 0.44 percent over the baseline forecast.
• On a static basis, the plan would lead to 0.3 percent 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 their earnings. on average for all taxpayers and 0.6 percent lower after-tax income on average for the top 1 percent in 2027, due to the expiration of the majority of the 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. cuts, but retention of chained CPI. When accounting for the increased GDP, after-tax incomes of all taxpayers would increase by 1.1 percent in the long run.

Introduction

On December 15, 2017, a House of Representatives and Senate Conference Committee released a unified version of the Tax Cuts and Jobs Act. This followed passage of the Tax Cuts and Jobs Act by the House of Representatives on November 16, 2017, and by the Senate on December 2, 2017. The Tax Cuts and Jobs Act would reform the individual income tax code by lowering tax rates on wages, investment, and business income; broadening the tax base; and simplifying the tax code. The plan would lower the corporate income tax rate to 21 percent and move the United States from a worldwide to a territorial system of taxation.

Our analysis[1] finds that the Tax Cuts and Jobs Act would reduce marginal tax rates on labor and investment. As a result, we estimate that the plan would increase long-run GDP by 1.7 percent. The larger economy would translate into 1.5 percent higher wages and result in an additional 339,000 full-time equivalent jobs. Due to the larger economy and the broader tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. , the plan would generate $600 billion in additional permanent revenue over the next decade on a dynamic basis. Overall, the plan would decrease federal revenues by $1.47 trillion on a static basis and by $448 billion on a dynamic basis. The remaining difference is explained by temporary dynamic revenue growth from the bill’s numerous expiring provisions.

These results differ from our previous analysis of the original House version of the Tax Cuts and Jobs Act and the original Senate version of the Tax Cuts and Jobs Act, due to the multitude of changes during each chamber’s markup process and agreements made during the conference committee.

Changes to the Individual Income Tax

• Lowers most individual income tax rates, including the top marginal rate from 39.6 percent to 37 percent. Retains the current seven-bracket structure, but bracket widths are modified. (Table 1 and Table 2)

Table 1. Tax Brackets for Ordinary Income Under Current Law and the Tax Cuts and Jobs Act (2018 Tax Year)

Single Filer
Current Law		Tax Cuts and Jobs Act
10%	$0-$9,525	10%	$0-$9,525
15%	$9,525-$38,700	12%	$9,525-$38,700
25%	$38,700-$93,700	22%	$38,700-$82,500
28%	$93,700-$195,450	24%	$82,500-$157,500
33%	$195,450-$424,950	32%	$157,500-$200,000
35%	$424,950-$426,700	35%	$200,000-$500,000
39.6%	$426,700+	37%	$500,000+

Table 2. Tax Brackets for Ordinary Income Under Current Law and the Tax Cuts and Jobs Act (2018 Tax Year)

Married Filing Jointly
Current Law		Tax Cuts and Jobs Act
Note: The Head of Household filing status is retained, with a separate bracket schedule.
10%	$0-$19,050	10%	$0-$19,050
15%	$19,050-$77,400	12%	$19,050-$77,400
25%	$77,400-$156,150	22%	$77,400-$165,000
28%	$156,150-$237,950	24%	$165,000-$315,000
33%	$237,950-$424,950	32%	$315,000-$400,000
35%	$424,950-$480,050	35%	$400,000-$600,000
39.60%	$480,050+	37%	$600,000+

• Indexes tax bracketsA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. and other provisions by the chained CPI measure of inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. .
• Increases the standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. to $12,000 for single filers, $18,000 for heads of household, and $24,000 for joint filers in 2018 (compared to $6,500, $9,550, and $13,000 respectively under current law).
• Eliminates the personal exemption.
• Retains the charitable contribution deduction, and limits the mortgage interest deductionThe mortgage interest deduction is an itemized deduction for interest paid on home mortgages. It reduces households’ taxable incomes and, consequently, their total taxes paid. The Tax Cuts and Jobs Act (TCJA) reduced the amount of principal and limited the types of loans that qualify for the deduction. to the first $750,000 in principal value. Limits the state and local tax deductionA tax deduction is a provision that reduces taxable income. A standard deduction is a single deduction at a fixed amount. Itemized deductions are popular among higher-income taxpayers who often have significant deductible expenses, such as state and local taxes paid, mortgage interest, and charitable contributions. to a combined $10,000 for income, sales, and property taxes. Taxes paid or accrued in carrying on a trade or business are not limited.
• Limits or eliminates a number of other deductions.
• Expands the child tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. from $1,000 to $2,000, while increasing the phaseout from $110,000 in current law to $400,000 married couples. The first $1,400 would be refundable.
• Effectively repeals the individual mandate penalty, by lowering the penalty amount to $0, effective January 1, 2019.
• Raises the exemption on the alternative minimum tax from $86,200 to $109,400 for married filers, and increases the phaseout threshold to $1 million.
• The majority of individual income tax changes would be temporary, expiring on December 31, 2025. Several, such as the adoption of chained CPI and functional repeal of the individual mandate, would be permanent.

Changes to Business Taxes

• Lowers 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. rate permanently to 21 percent, starting in 2018.
• Establishes a 20 percent deduction of qualified business income from certain pass-through businesses. Specific service industries, such as health, law, and professional services, are excluded. However, joint filers with income below $315,000 and other filers with income below $157,500 can claim the deduction fully on income from service industries. This provision would expire December 31, 2025.
• Allows full and immediate expensing of short-lived capital investments for five years. Increases the section 179 expensing cap from $500,000 to $1 million.
• Limits the deductibility of net interest expense to 30 percent of earnings before interest, taxes, depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. , and amortization (EBITDA) for four years, and 30 percent of earnings before interest and taxes (EBIT) thereafter.
• Eliminates net operating loss carrybacks and limits carryforwards to 80 percent of taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. .
• Eliminates the domestic production activities deduction (section 199) and modifies other provisions, such as the orphan drug credit and the rehabilitation credit.
• Enacts deemed repatriationTax repatriation is the process by which multinational companies bring overseas earnings back to the home country. Prior to the 2017 Tax Cuts and Jobs Act (TCJA), the U.S. tax code created major disincentives for U.S. companies to repatriate their earnings. Changes from the TCJA eliminate these disincentives. of currently deferred foreign profits, at a rate of 15.5 percent for cash and cash-equivalent profits and 8 percent for reinvested foreign earnings.
• Moves to a territorial system with base erosion rules.
• Eliminates the corporate alternative minimum tax.

Other Changes

• Doubles the estate tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the Internal Revenue Service (IRS), preventing them from having to pay income tax. from $5.6 million to $11.2 million, which expires on December 31, 2025. The exemption will increase with inflation.

Impact on the Economy

According to the Tax Foundation’s Taxes and Growth Model, the Tax Cuts and Jobs Act would increase the long-run size of the U.S. economy by 1.7 percent (Table 3). The larger economy would result in 1.5 percent higher wages and a 4.8 percent larger capital stock. The plan would also result in 339,000 additional full-time equivalent jobs.

The larger economy and higher wages are due chiefly to the significantly lower cost of capital under the proposal, which reduces the corporate income tax rate and accelerates expensing of capital investment for short-lived assets.

Table 3. 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	339,000

The long-run economic changes are generated by the corporate income tax rate cut. Table 4 below isolates the economic impact of this key provision that increases long-run economic growth.

Table 4. Key Provision Increasing Economic Growth, 2018-2027

Provision	Long-run GDP Growth
Source: Tax Foundation Taxes and Growth Model, November 2017.
Note: That long-run GDP growth figure is larger than the 1.7 percent of total growth from the plan because several other provisions have negative growth effects. A full list of economic effects by provisions is found in Table 5.
Lower the corporate income tax rate to 21 percent.	2.6%

The growth of GDP under this plan, however, is not linear. In 2018, the first year of this tax plan, growth is projected to jump 0.44 percent above the current baseline projection as firms take advantage of the full and immediate expensing of equipment and the lower corporate income tax rate. These provisions encourage capital investment.

The initial spike in growth is reduced later during the decade, however, when growth falls slightly below the baseline. This is due to the temporary nature of many of these provisions. Economic growth is borrowed from the future, but the plan, in aggregate, still increases economic growth over the long run. The figure below illustrates this phenomenon.

Over the next decade, the Tax Cuts and Jobs Act would increase GDP by 2.86 percent over the current baseline forecasts, or an average of 0.29 percent per year. This means an increase of total GDP of approximately $5 trillion over the next decade, well exceeding the revenue lost by the plan.

Impact on Revenue

If fully implemented, the proposal would reduce federal revenue by $1.47 trillion over the next decade on a static basis (Figure 2) using a current law baseline. The plan would reduce individual income tax revenue, excluding the changes for noncorporate business tax filers, by $1.1 trillion over the next decade. Tax revenue from the corporate income tax and from taxation of pass-through business income would fall by $617 billion. The remainder of the revenue loss would be due to the doubling of the estate tax exemption, resulting in a revenue loss of $72 billion.

On a dynamic basis, this plan would generate an additional $600 billion in revenues, reducing the cost of the plan over the next decade. The larger economy would boost wages and thus broaden both the income and payroll tax base. As a result, the federal government would see a smaller revenue loss from personal tax changes, of $494 billion. The reduction in tax revenue from business changes would also be smaller on a dynamic basis, at $565 billion. The corporate tax revenue loss would be most significant in the short term because of the temporary expensing provision for short-lived assets, which would encourage more investment and result in businesses taking larger deductions for capital investments in the first five years of the plan.

The figure below compares static and dynamic revenue collection to the current law baseline. By the end of the decade, dynamic revenues have exceeded the baseline. In fact, dynamic revenues exceed the current law baseline in 2023, when the temporary expensing provisions expire, as the costs of the plan drop.

By 2024, dynamic revenue projections are back above the baseline projections, meaning that federal revenues would actually increase in those years when accounting for economic growth. In 2026, static revenue projections are also above the baseline projections, largely due to the expiration of many individual provisions. These results, however, should not be interpreted to mean that these tax changes are self-financing. Instead, they illustrate that the Tax Cuts and Jobs Act includes a number of revenue offsets to reduce the overall cost of the tax rate cuts included in the plan.

The first large set of base broadeners is the elimination of a number of credits and deductions for individuals. Notably, the state and local tax deduction would be limited to a maximum deduction of $10,000 for income, sales, and property taxes (except as they are related to business activity), and the mortgage interest deduction would be limited to the first $750,000 in principal value. The plan would also limit a number of deductions. These provisions would raise $640 billion over the next decade.

On the business side, the bill includes several base broadeners. It would limit the net interest deduction to 30 percent of earnings before interest, taxes, depreciation, and amortization (EBITDA) for four years, and 30 percent of earnings before interest and taxes (EBIT) thereafter, including for already originated loans. It would also limit or eliminate a number of business tax expenditures, such as the domestic production activities (section 199) deduction, the orphan drug credit, and the deduction for entertainment expenses. Repealing and limiting many of these expenditures would generate $1.0 trillion in revenue.

The largest source of revenue loss in the first decade would be the individual and corporate rate cuts. The Tax Cuts and Jobs Act would retain the current seven individual income tax brackets, but would modify both their widths and tax rates. The top 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. would fall from 39.6 percent under current law to 37 percent, with many other rates decreasing as well. The individual income tax rate changes, however, are temporary until December 31, 2025. This reduces the cost of the changes over the 10-year budget window, as they are only in effect for eight of the 10 years. These changes would reduce revenues by $1.9 trillion. The corporate income tax rate would fall from 35 percent to 21 percent on January 1, 2018, reducing revenues by $1.4 trillion. The plan would also provide many pass-through businesses with a 20 percent deduction for pass-through businessA pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates. income. Specified service business would be ineligible, except for households with taxable income below $157,500 for single filers and $315,000 for married filers. This provision reduces revenue by $289 billion. The pass-through provisions expire at the end of 2025.

Table 5 summarizes the revenue impacts, both static and dynamic, of each of the major provisions.

Table 5. Ten-Year Revenue and Economic Impacts of the Tax Cuts and Jobs Act by Provision

	Change in static revenue, 2018-2027 (billions of dollars)	Change in long-run GDP	Change in dynamic revenue, 2018-2027 (billions of dollars)
Source: Tax Foundation Taxes and Growth Model, November 2017.
Note: Changes to the taxation of pass-through businesses is a change to the individual income tax revenue collections, but for simplicity, we’ve included those changes under the Business subcomponent. However, the differential rate on pass-through businesses does have interactions with the individual income tax rate and bracket restructuring under this plan.
Individual
Raise the alternative minimum tax exemption and the exemption phaseout threshold	-$209	0.0%	-$266
Adjust individual income tax rates and thresholds, creating seven rates of 10%, 12%, 22%, 24%, 32%, 35%, and 37%.	-$1,873	0.0%	-$1,589
Increase the standard deduction to $12,000/$18,000/$24,000.	-$774	0.0%	-$708
Repeal personal exemptions.	$1,318	0.0%	$1,227
Increase the child tax credit amount to $2,000. Initially, only the first $1,400 of the credit is refundable. Decrease the phase-in threshold of the refundable portion of the credit to $2,500. Increase the phaseout threshold of the credit to $400,000 for married filers and $200,000 for other filers. Create a $500 nonrefundable credit for non-child dependents.	-$590	0.0%	-$562
Cap the deduction for state and local taxes paid at $10,000. Cap the mortgage interest deduction at $750,000 of acquisition debt. Eliminate several other deductions. Limit the casualty loss deduction, and modify limits on the charitable deduction. Repeal the Pease limitation on itemized deductions.	$593	0.0%	$575
Modify or repeal other personal deductions, credits, and exclusions.	$47	0.0%	$47
Index bracket thresholds, the standard deduction amount, the refundable portion of the child tax credit, and other provisions to chained CPI (economic effect not modeled).	$151	0.0%	$151
Individual subtotal	-$1,338	0.0%	-$1,125
Business
Lower the corporate income tax rate to 21 percent, effective 1/1/2018	-$1,420	2.6%	-$668
Create a 20% deduction for pass-through business income. The deduction is limited for households with more than $157,500/$315,000 that earn income from service businesses; these households are also subject to a test based on each business’s W-2 wages.	-$289	0.0%	-$213
Increase the limit for §179 expensing. Require R&D expenses to be amortized after 2021. Limit interest deductibility to 30% of EBITDA until 2021 and 30% of EBIT afterward. Limit NOL deductions to 80% of taxable income. Allow 100% expensing for assets other than structures for five years, phased out over successive years.	$778	-0.6%	$778
Modify or repeal other business deductions, credits, and other provisions.	$233	-0.3%	$186
Enact a deemed repatriation of foreign-source income at a rate of 15.5% for liquid assets and 8% for illiquid assets.	$339	0.0%	$339
Modify several aspects of the tax treatment of foreign-source income.	-$14	0.0%	-$14
Business subtotal	-$373	1.7%	$408
Other
Double the estate tax exemption	-$72	0.0%	-$46
Total revenue change	-$1,783	1.7%	-$762
Lower the individual mandate penalty to $0 (economic effect not modeled).	$314	0.0%	$314
TOTAL	-$1,469	1.7%	-$448

For many of these provisions, such as the individual income tax cuts, there is no long-term economic growth generated because they expire. However, they do provide some dynamic revenue for the period in which they are in place. For instance, the individual income tax rate cuts do not produce long-run economic growth, but do provide $284 billion in dynamic revenue. Individuals would take advantage of the lower marginal tax rates for the time that the tax cuts are in effect, temporarily increasing their labor force participation and their hours worked, but we would expect that the additional work effort would revert to its baseline level after the tax cuts expire.

Revenue Impacts Beyond the First Decade

Although the plan would reduce federal revenues by $1.47 trillion over the next 10 years, the plan would also have a smaller impact on revenues in the second decade. There are several provisions that contribute to the first decade’s higher transitional costs, including changes to expensing rules and inflation measures.

The plan would index tax brackets, the standard deduction, and other provisions to chained CPI rather than CPI. This provision would raise relatively little revenue in the short term, but would increase revenue over time as these two inflation indices diverge.

Moving in the opposite direction is the temporary nature of the majority of the individual income tax changes. Most of the individual tax changes expire on December 31, 2025. Only several provisions, such as the adoption of chained CPI and the functional repeal of the individual mandate, are permanent. The expiration of these provisions lowers the cost of the plan within the second decade, as they are no longer in effect. If those provisions are extended or made permanent in the future, the costs of the bill would be higher than stated in this paper.

Moving to temporary full expensing for short-lived assets would also reduce revenues in the first decade. Because this provision is currently slated to expire after five years, its impacts in the second decade are limited. However, any future changes to this provision, such as extending it or making it permanent, could impact revenues in the future.

The plan includes a major transitional revenue raiser, deemed repatriation. This proposal would tax corporations on their current deferred offshore profits and raise $339 billion over the next decade. We assume that this provision would only raise revenue in the first decade.

Distributional Impact of the Plan

On a static basis, the Tax Cuts and Jobs Act would increase the after-tax incomes of taxpayers in every taxpayer group in 2018. The bottom 80 percent of taxpayers (those in the bottom four quintiles) would see an average increase in after-tax income ranging from 0.8 to 1.7 percent. Taxpayers in the top 1 percent would see an increase in after-tax income on a static basis of 1.6 percent, driven by the lower pass-through tax rate and the lower corporate income tax.

By 2027, the distribution of the federal tax burden would look different, for several reasons. First, the bill includes temporary provisions, such as increased expensing for short-lived capital investments for businesses and the majority of the individual tax changes. Because these provisions would expire after 2025, taxpayers would not benefit from them in 2027. Second, by 2027 taxpayers would be subject to the effect of indexing bracket thresholds to chained CPI, which would reduce the benefit of the increased standard deduction and individual income tax cuts.

Additionally, unlike the methodology of the Joint Committee on Taxation, we do not distribute the functional repeal of the individual mandate. By dropping the individual mandate penalty to zero, JCT assumes that fewer individuals will purchase insurance, reducing the number of individuals, particularly among low-income households, that claim a premium tax credit to offset the cost of purchasing insurance.[2] We did not distribute the individual mandate changes.

These distributional tables also do not reflect any transitional revenue effects from changes to depreciation under this plan.

Accounting for these factors, most groups of taxpayers on a static basis would still see a decrease in after-tax income, on average, in 2027. The bottom 80 percent of taxpayers would see an average increase in after-tax income ranging from -0.2 to 0.1 percent. The top 1 percent would see the largest decrease in after-tax income on a static basis, of -0.6 percent.

However, by 2027, the economic growth effects of the tax bill will have largely been realized. Taking these effects into account, taxpayers as a whole would see an increase in after-tax incomes of at least 1.1 percent. The bottom 80 percent of taxpayers would see their after-tax incomes increase from 0.8 to 1.7 percent. The top 1 percent of all taxpayers would see a decrease in after-tax income of -0.2 percent on a dynamic basis, largely due to chained CPI, the alternative minimum tax, and the net interest deduction limitation.

These dynamic results include the impact of both individual and corporate income tax changes on the U.S. economy. Static estimates assume that 25 percent of the cost of the corporate income tax is borne by labor. Dynamic estimates assume that 70 percent of the full burden of the corporate income tax is borne by labor, due to the negative effects of the tax on investment and wages.

Table 6. Static and Dynamic Distributional Analysis

All changes, 2018			All changes, 2027
Income Group	Static		Income Group	Static	Dynamic
0% to 20%	0.8%		0% to 20%	0.0%	1.7%
20% to 40%	1.7%		20% to 40%	-0.2%	1.3%
40% to 60%	1.7%		40% to 60%	0.1%	1.7%
60% to 80%	1.7%		60% to 80%	0.0%	1.6%
80% to 100%	1.9%		80% to 100%	-0.4%	0.8%
80% to 90%	1.9%		80% to 90%	-0.2%	1.4%
90% to 95%	1.8%		90% to 95%	-0.6%	1.4%
95% to 99%	2.2%		95% to 99%	-0.6%	0.9%
99% to 100%	1.6%		99% to 100%	-0.6%	-0.2%
TOTAL	1.8%		TOTAL	-0.3%	1.1%

Making the Plan Permanent

As discussed previously, many of the provisions of this tax bill would expire on December 31, 2025, to ensure the bill meets the requirements of the Senate’s Byrd Rule. We have also scored the plan as if the plan were made permanent. This change would increase the cost of the plan, but also increase the economic growth and dynamic revenue generated by the plan.

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 cost of the bill would be $2.7 trillion on a static basis ($1.4 trillion on a dynamic basis) over the next decade. By 2027, the dynamic revenue projections would exceed the baseline revenue projections by $32 billion, with the trend continuing into the subsequent decade.

Table 7. Economic Impact of the Tax Cuts and Jobs Act, if Made Permanent

Source: Tax Foundation Taxes and Growth Model, November 2017.
Change in long-run GDP	4.7%
Change in long-run capital stock	12.0%
Change in long-run wage rate	3.3%
Change in long-run full-time equivalent jobs	1,614,000

These changes would also have profound impacts on the distributional tables. While the distributional table in 2018 would be the same (as no provisions are expiring before 2018), taxpayers would see a dramatically higher increase in after-tax incomes in 2027 under a permanent tax plan.

On average, after-tax incomes would increase by 1.9 percent, with the bottom 80 percent seeing increases between 0.7 and 1.7 percent. The top 1 percent would see an increase of 2.5 percent.

After accounting for economic growth, after-tax incomes would increase by 6.5 percent on average, assuming the plan is made permanent. The bottom 80 percent would see increases between 5.8 and 6.6 percent, with the top 1 percent seeing an increase of 5.7 percent.

These distributional tables—similar to the ones above—do not, however, distribute the economic impacts of the functional repeal of the individual mandate.

All changes, 2018			All changes, 2027
Income Group	Static		Income Group	Static	Dynamic
0% to 20%	0.8%		0% to 20%	0.7%	5.8%
20% to 40%	1.7%		20% to 40%	1.4%	6.2%
40% to 60%	1.7%		40% to 60%	1.7%	6.6%
60% to 80%	1.7%		60% to 80%	1.7%	6.6%
80% to 100%	1.9%		80% to 100%	2.1%	6.5%
80% to 90%	1.9%		80% to 90%	1.8%	6.7%
90% to 95%	1.8%		90% to 95%	1.8%	6.7%
95% to 99%	2.2%		95% to 99%	2.2%	7.1%
99% to 100%	1.6%		99% to 100%	2.5%	5.7%
TOTAL	1.8%		TOTAL	1.9%	6.5%

Differences with the Model Results from the Joint Committee on Taxation

On December 15, 2017, the Joint Committee on Taxation released a static estimate of the revenue effects of the Tax Cuts and Jobs Act.[3] While preparing this report, the Tax Foundation relied in several instances on the Joint Committee’s estimates, particularly regarding tax provisions about which little public data exists. However, for most major provisions of the bill, the Tax Foundation estimated revenue effects using its own revenue model. On some provisions, the Tax Foundation model results were quite similar to those of the Joint Committee; for other provisions, the results diverged.

Overall, the Joint Committee on Taxation estimated that the plan would reduce federal revenue by $1.46 trillion between 2018 and 2027. This is a lower cost estimate than the Tax Foundation’s static score of $1.47 trillion. The Joint Committee on Taxation did not release a dynamic score of the plan.

Our static scores on individual income tax provisions varied significantly. The Tax Foundation’s higher estimate for the cost of consolidating and lowering individual tax rates may be because the Tax Foundation’s model utilizes taxpayer microdata from 2008, while the Joint Committee’s model may have access to more recent taxpayer data.

Uncertainty in Modeling Estimates

There are three primary sources of uncertainty in modeling the provisions of the Tax Cuts and Jobs Act: the significance of deficit effects, the timing of economic effects, and expectations regarding the extension of temporary provisions.

Some economic models assume that there is a limited amount of saving available to the United States to fund new investment opportunities when taxes on investment are reduced, and that when the federal budget deficit increases, the amount of available saving for private investment is “crowded out” by government borrowing, which reduces the long-run size of the U.S. economy. While past empirical work has found evidence of crowd-out, the estimated impact is usually small. Furthermore, global savings remains high, which may explain why interest rates remain low despite rising budget deficits. We assume that global saving is available to assist in the expansion of U.S. investment, and that a modest deficit increase will not meaningfully crowd out private investment in the United States.[4]

We are also forced to make certain assumptions about how quickly the economy would respond to lower tax burdens on investment. There is an inherent level of uncertainty here that could impact the timing of revenue generation within the budget window.

Finally, we assume that temporary tax changes will expire on schedule, and that business decisions will be made in anticipation of this expiration. To the extent that investments are made in the anticipation that temporary expensing provisions might be extended, economic effects could exceed our projections.

Conclusion

The Tax Cuts and Jobs Act represents a dramatic overhaul of the U.S. tax code. Our model results indicate that the plan would be pro-growth, boosting long-run GDP 1.7 percent and increasing the domestic capital stock by 4.8 percent. Wages, long stagnant, would increase 1.5 percent, while the reform would produce 339,000 jobs. These economic effects would have a substantial impact on revenues as well, as indicated by the plan’s significantly lower revenue losses under dynamic scoring.

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[1] This analysis includes corrections made to our model in November 2017, to address concerns raised by the Washington Center for Equitable Growth.

[2] Nicole Kaeding, “Understanding JCT’s New Distributional Tables for the Senate’s Tax Cuts and Jobs Act,” Tax Foundation, November 16, 2017, https://taxfoundation.org/understanding-jcts-new-distributional-tables-senates-tax-cuts-jobs-act/.

[3] The Joint Committee on Taxation, “Estimated Budget Effects of the Conference Agreement for H.R. 1, “Tax Cuts and Jobs Act,” #17-2 128 R3, /wp-content/uploads/2017/12/TCJA_Conference_Report.pdf.

[4] Gavin Ekins, “Time to Shoulder Aside ‘Crowding Out’ As an Excuse Not to Do Tax Reform,” Tax Foundation, November 7, 2017, https://taxfoundation.org/crowding-out-tax-reform/.

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