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 Tax Cuts and Jobs Act. This bill, if passed by Congress, would lower individual income tax rates for the next eight years, lower the corporate income tax from 35 percent to 21 percent, and move the United States from a worldwide tax system to a territorial tax system.

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. 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. 

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 income 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.