by Bill Gale

EconoFact

The 2017 Tax Cut and Jobs Act (TCJA) was the most sweeping realignment of the U.S. tax code in over three decades. It lowered tax rates, simplified taxes, raised the government debt, and was regressive, benefitting people who are well off more than the middle-class and the poor. Many provisions of the TCJA expire in 2025 unless action is preserves them. What would the expiration, or the continuation, of these provisions mean for people’s tax burdens, government debt, and the performance of the American economy? In the newest EconoFact Chats episode, 

Is a Major Tax Change Coming? Bill Gale (Brookings) discusses the effects of the TCJA and the likely consequences of the expiration of some of its provisions. He notes: 

• Some provisions of the TCJA face expiration because the legislation did not have the required 60 votes in the Senate. Republicans used “reconciliation” to pass the bill.  This required making some provisions temporary so the Act would not add to the government budget deficit after the tenth year.
• The set of permanent provisions in the TCJA are more regressive. While those set to expire are more progressive (including rate cuts for individuals, changes to the personal exemption and the standard exemption, and the child tax credit).
• Gauging the effects of the TCJA is difficult because Covid hit two years after its enactment. But Bill says that the available research does not support the purported reasons for the bill since it did not seem to raise investment, or, through productivity gains, workers’ wages. But it did clearly add to the deficit.  It also favors the rich. Households in the top 1% got a tax cut of about $1,000 per week while those in the bottom 20% got a tax cut of about $1 per week.

Bill concludes the discussion by pointing out that the fate of the temporary provisions of the TCJA does not just depend upon whether Republicans or Democrats control Congress and the White House since there are camps within each party that are relatively more dovish or hawkish on the deficit consequences of the TCJA.  He notes there is a great search for “pay-fors” such as raising the corporate tax rate or lowering the estate tax exemption – but these still do not come close to closing the TCJA revenue gap.

Click below to listen to this podcast, or read its transcript here. Partial of “Is a Major Tax Change Coming?” is the transcript below . . .

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William Gale
The TCJA made very substantial changes to the income tax, the estate tax, and the corporate tax. Probably the most well-known changes are in the corporate tax, where it cut the top rate to 21%, and increased incentives for investment. There are also a variety of technical changes in the corporate tax that limited firms’ ability to take losses, for example. On the individual side, everyone who pays taxes got a reduction in their marginal tax rate, and there was a change in the treatment of children and families.

We used to have personal exemptions and a relatively small standard deduction, and what the Tax Act did was eliminate the personal exemption, but increase the standard deduction. So small families had a tax cut on net from that, large families had a tax increase on that on net, but the legislators also increased the child credit to offset that impact on large families. There are a variety of other changes in the individual tax as well. The most kind of tricky one is the change of the way the tax brackets will be indexed for inflation in the future. This is kind of a clandestine tax increase that will continue on indefinitely and will most likely be invisible to most people.

Comment

Comment

William Gale
Let me talk about four things that we think we know about TCJA and three things that we’re not sure about.

– The four things we think we know are that marginal tax rates and tax burdens went down, that’s number one.

– Number two is the Tax Cut and Jobs Act. Simplifying taxes for many people by raising the standard deduction and reducing their tendency to itemize. By a variety of changes that made the alternative minimum tax, which is this opaque parallel system, made the AMT (alternative minimum tax) less relevant for almost all households. So, it simplified for households. On the other hand, it may have complicated taxes for businesses through a couple of provisions.

– The third thing we know is that TCJA lost a lot of money for the government. The revenue and interest costs put it at over $2 trillion for the decade, and

– The fourth thing we know is TCJA was regressive. Households in the top 1% got a tax cut of about $1,000 per week. Households in the bottom 20% got a tax cut of about $1 per week.

The rest of the commentary is here: