The United States Congressional Research Service (CRS) is a legislative branch agency located within the Library of Congress, serves as shared staff exclusively to congressional committees and Members of Congress. Its reports provide Congress with both anticipatory and on-demand research and analysis to support their legislative, oversight, and representational duties.

The Economic Effects of the 2017 Tax Revision: Preliminary Observations, 7 June 2019

By Jane G. Gravelle (Senior Specialist in Economic Policy) & Donald J. Marples (Specialist in Public Finance)

Introduction:

The 2017 tax revision, P.L. 115-97, often referred to as the Tax Cuts and Jobs Act, and referred to subsequently as the Act, substantially revised the U.S. tax system. The Act permanently reduced the corporate tax rate to 21%, made a number of revisions in business tax deductions (including limits on interest deductions), and provided a major revision in the international tax rules. It also substantially revised individual income taxes, including an increase in the standard deduction and child credit largely offset by eliminating personal exemptions, along with rate cuts, limits on itemized deductions (primarily a dollar cap on the state and local tax deduction), and a 20% deduction for pass-through businesses (businesses taxed under the individual rather than the corporate tax, such as partnerships). These individual provisions are temporary and are scheduled to expire after 2025. The Act also adopted temporary provisions allowing the immediate deduction for equipment investment and an increase in the exemption for estate and gift taxes. The Joint Committee on Taxation (JCT) estimated that these changes would reduce tax revenue by $1.5 trillion over 10 years.

In 2018, gross domestic product (GDP) grew at 2.9%. On the whole, the growth effects tend to show a relatively small (if any) first-year effect on the economy. Although growth rates cannot indicate the tax cut’s effects on GDP, they tend to rule out very large effects particularly in the short run. Although investment grew significantly, the growth patterns for different types of assets do not appear to be consistent with the direction and size of the supply-side incentive effects one would expect from the tax changes. This potential outcome may raise questions about how much longer-run growth will result from the tax revision.

CBO, in its first baseline update post enactment, initially estimated that the Act would reduce individual income taxes by $65 billion, corporate income taxes by $94 billion, and other taxes by $3 billion, for a total reduction of $163 billion in FY2018. Corporate revenues were about $40 billion less than projected whereas individual revenues were higher, with an overall revenue reduction of about $9 billion. From 2017 to 2018, the estimated average corporate tax rate fell from 23.4% to 12.1% and individual income taxes as a percentage of personal income fell slightly from 9.6% to 9.2%.

Real wages grew more slowly than GDP: at 2.0% (adjusted by the GDP deflator) compared with 2.9% for overall real GDP. Such slower growth has occurred in the past. The real wage rate for production and nonsupervisory workers grew by 1.2%.

Although significant amounts of dividends were repatriated in 2018 compared with previous years, the data do not appear to show a significant increase in investment flows from abroad. While evidence does indicate significant repurchases of shares, either from tax cuts or repatriated revenues, relatively little was directed to paying worker bonuses, which had been announced by some firms.

Although the legislation contained a number of provisions that discouraged inversions (shifting headquarters of U.S. firms abroad), these inversions had apparently already been significantly slowed by regulations adopted in 2014, 2015, and 2016

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