Tax cut plan could lead to substantial economic growth

  • 21 December 2017
  • NormanL
Tax cut plan could lead to substantial economic growth

With passage of a massive tax cut/reform bill (just in time for Christmas), the obvious questions are what the new law will do, and who will benefit? The nonpartisan Tax Foundation issued a preliminary analysis of the law, and its major findings are:

The Tax 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 income 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 tax 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.

The possibility that the tax bill could be close to revenue neutral -- meaning that the federal government doesn't lose a great deal of revenue even as most taxpayers get rate cuts, is the wrinkle to watch closely.

If the tax cuts spur economic growth (and thus, tax receipts), then the Democratic sound and fury that this measure is the worst legislation passed in the history of mankind sound even more ludicrous than currently.

It would also ease some of the pressure on caused by spending...which Congress has shown no real desire to curb, let alone cut. That does not mean the spending problem goes away -- far from it. Government's obsessive use of the national credit card is unsustainable. That's the problem the worthies must address...the sooner, the better.