Tax Cuts & Jobs Act: Impacts on US Tax Codes & Economy - Research Paper

Introduction

Michael (2017) noted that the Tax Cuts and Jobs Act, also known as the TCJA, which was enacted in December 2017 is one of the critical updates that the United States tax codes received in over thirty years. This bill was expected to lower taxes imposed on companies as well as individual people while at the same time facilitating more jobs, higher wages, as well as multiple opportunities through an economy that is larger and more dynamic. The law also incorporates features that enable growth including a severe reduction in the rate of corporate tax, local tax deduction, a scaled-back state full expensing for five years as well as the lower individual tax rate.

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Effects of Tax Cut and Jobs Act on the Economy

Several methods can be used to measure the impact of TCJA on the aggregate economy. Gale et al. (2018) indicate that many studies suggest that TCJA will increase the GDP with average approximation ranging between 0.3 and 0.9% in the first three years. The general pattern is that GDP is estimated to raise more than it would have been before declining in the following years as the individual income tax cuts and property tax cuts increase. For instance, Gale et al., (2018) explain that TPC projects that the GDP will be 5% higher than it should have been without the TCJA but will decline over a decade from 0.8% to 0.5% in 2020 and decline further to a negligible amount by 2027. The higher output in the early years is attributed to the increased spending by both individuals and corporations. However, as the economy approaches the state of full employment, the advantages of increased demand disintegrate. Nevertheless, the economy would enjoy increased investment as well as labor supply, but the gains are offset partially by the crowding out of the investment, which is as a result of high interest rates.

By 2027, the effect on the size of GDP will range between 0.1 and 1.1% even though this range is higher by 0.2 and 0.1 % than it would have otherwise been expected between 2027 and 2028 respectively. This variation illustrates the vital role of capital inflows as well as the subsequent payments to the investors. Furthermore, the GDP will be more than the GNP since offshore earnings will be reported as domestic profits because of the modified tax incentives for allocating revenues from intangible assets. However, if the temporary provisions are extended and the planned upsurges in some companies are prevented from taking effect, the economy would be 0.1% larger as compared to the relative baseline which assumes that the pre-TCJA law will be maintained permanently. Even though the baseline seems suitable for the estimations that examine the theoretical aspect of TCJA, it assumes that the provisions for TCJA are made on a permanent basis since policymakers have a tendency to extend temporary provisions into permanent. However, under this baseline, the GDP is estimated to be about 0.3% larger in the tenth year. Therefore, this notion would imply that the TCJA would raise GDP by 0.7% in 2027 instead of 0.1-0.3%.

Moss (2019) explains that the enactment of TCJA would raise the federal deficit from the current estimation of 3.2% of GDP to 3.5% in the initial years. This deficit would mean that approximately 100 billion dollars would reduce the revenue in the United States Treasury. Furthermore, the debt is expected to increase up to one trillion dollars by late 2019 or early 2020. That is a significant amount that could have been useful for the economy. These impacts on the economy are expected to occur via changes in the capital stock through adjustments in investment, as well as the labor market through changes in labor supply and wages. The increase is attributed to deductions for qualified pass-through company income, the lower corporate income tax (CIT) rate, 100% expensing as well as lesser individual tax rate partly through rate reductions and partly through adjustments in rate brackets.

Effects of Tax Cut and Jobs Act on the United States Corporations

According to Pizzola, Carroll & Mackie (2018), even though the long-term modifications on the Industry GDP are modest and reflect direct tax effects on the corporations as well as indirect impacts through factor and goods market. The long-term results indicate the net company-specific effects of CIT rate reduction, the mandatory amortization of R&E expenditures as well as the net interest expense deduction limitation. Industries which have expansions that are above average will benefit in a sense unreasonably from the CIT rate reductions. However, those with smaller companies will suffer from the required amortization of R&E or the net interest expense deduction limitation. In addition, the most significant percentage of change that is relative to the pre-TCJA baseline are typically identified in the insurance and finance (1.3%), construction (0.4%), warehousing and transportation (0.4%), as well as the real estate and rental and leasing (0.4%) corporations (Pizzola et al., 2018). Nonetheless, durable and nondurable manufacturing industries, as well as the research-intensive industries such as chemical products manufacturing and computer and electronic product manufacturing industries, are estimated to have a noticeable growth in their METR due to the R&E amortization.

Smaller businesses are expected to benefit from a reduction in individual income taxes by 40%. Furthermore, smaller companies are also likely to benefit from a 20% deduction of pass-through entities. However, the deduction is phased for service business owners such as lawyers and consultants (Tyson, 2019). Smaller businesses will also benefit from better equipment expensing rules such that the company can deduct up to one million in such expenses up to the limit of their annual business income (Tyson, 2019).

References

Gale, W. G., Gelfond, H., Krupkin, A., Mazur, M., & Toder, E. (2018). Effects of the Tax Cuts and Jobs Act: A preliminary analysis. Retrieved from Tax Policy Center website: https://www.brookings.edu/wp-content/uploads/2018/06/ES_20180608_tcja_summary_paper_final.pdf

Michael, A. (2017). Analysis of the 2017 Tax Cuts and Jobs Act (4800). Retrieved from The Heritage Foundation website: https://www.heritage.org/sites/default/files/2017-12/IB4800_0.pdf

Moss, W. (2019, June 25). How Has the Tax Cuts and Jobs Act Affected the US Economy? Retrieved from https://www.thebalance.com/how-proposed-trump-tax-cuts-affect-economy-4120649

Pizzola, B., Carroll, R., & Mackie, J. (2018). Analyzing the macroeconomic impacts of the Tax Cuts and Jobs Act on the US economy and key industries. Retrieved from EY website: https://www.ey.com/Publication/vwLUAssets/ey-tax-reform-projected-to-grow-us-economy/$FILE/ey-tax-reform-projected-to-grow-us-economy.pdf

Tyson, E. (2019, March 27). How the Tax Cuts and Jobs Act Will Affect Your Small Business. Retrieved from https://articles.bplans.com/how-the-tax-cuts-and-jobs-act-will-affect-your-small-business/