Tax Law’s Official Scorekeeper Sees Small Boost to Economic Growth

The tax law that President Donald Trump signed Friday will have a tiny effect on economic growth after a decade, Congress’s official scorekeeper said Friday. The Joint Committee on Taxation said that gross domestic product would only be 0.1% to 0.2% larger by 2027 thanks to the tax overhaul, which includes $1.5 trillion in tax cuts and is expected to add about $1 trillion in deficits. On average, the new JCT analysis said the economy would be 0.7% larger over the next 10 years thanks to the law’s lower personal and business tax rates and more generous treatment of capital spending. But that average obscures a big swing over 10 years. Over most of the period output would be 0.8% to 0.9% larger, but that rapidly fades as many of the bill’s key provisions expire. Spread over a decade, the 0.1% to 0. range implies average annual GDP growth would be just 0.02 percentage points higher – almost indistinguishable from zero. The growth effect would be larger if the provisions that expire are instead extended, as many of the law’s proponents hope. The analysis was released Friday afternoon, too late to have any impact on passage of the legislation. The JCT conducted similar “dynamic” analyses of the separate House and Senate bills. It concluded they would raise average output by a similar 0.7% and 0.8% respectively, but it had not quantified the effect of letting some of the provisions expire. The analysis shows that much of the growth boost comes from the reduction in marginal individual tax rates, which encourages more people to work or to generate income through pass-through businesses (which aren’t corporations and thus don’t pay the corporate tax rate). When those expire in 2025, “the increase in labor supply is expected to decline.” The phasing out of full expensing of capital equipment purchases after 2022 and the end in 2025 of a deduction for pass-through businesses “slow the rate of new investment.” That means by 2027, the only major provision still in effect is the lower corporate tax rate of 21% (it is currently 35%) and international provisions aimed at bringing profits and production back to the U.S. Its positive impact on investment is largely offset by higher interest rates due to an increase in the national debt. That is a considerably more pessimistic than what the law’s Republican authors have hoped, although it is line with the findings of nonpartisan outside analysts such as the Penn Wharton Budget Model at the University of Pennsylvania. In the years after 2027, the law begins to discourage work because a new inflation formula gradually pushes workers into higher tax brackets relative to the previous system. Meanwhile, the higher debt continues to underpin interest rates. By 2047, that “partially or wholly offsets” the incentive for business to add to the stock of plant and equipment from the lower corporate rate. The JCT says higher growth defrays the total cost of the tax cuts but not by enough for the cuts to pay for themselves. Without considering growth effects, the law loses $1.5 trillion in revenue over a decade. The 0.7% average growth boost generates $451 billion in new revenue, but higher interest rates add $66 billion in cost, for a net deficit impact of about $1.1 trillion. More Will You Get a Tax Cut? Find Out How Consensus for Corporate Tax Cut Split Into a Brawl

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