The Tax Cuts and Jobs Act: A Mixed Bag After Its One-Year Anniversary

A couple of days ago, we had the one-year anniversary of the Tax Cuts and Jobs Act (TCJA). This tax bill passed by the Republicans is the most significant tax reform passed in about thirty years. The types of reform ranged from permanent corporate tax cuts and temporary income tax cuts to repatriation, the mortgage interest deduction, and the child tax credit. I covered the topic twice already (see here and here), and I have to say that there was quite a bit to analyze. With all the speculation and postulating, how are we faring one year after the signing of the TCJA? It is difficult to determine the answer to this question, not only because of how encompassing the TCJA is, but also because it takes time for such reforms to fully take effect. Nevertheless, I made an attempt to answer the question.

A growing deficit. The single largest complaint I have about the TCJA is that it would balloon the deficit. The Joint Committee on Taxation estimated that it would increase the debt by $1.4T over the next decade, whereas the Congressional Budget Office estimated that it would be $1.9T. This would not be a surprising outcome since Congress cut taxes through the TCJA without addressing the spending increases. Without changing our course of action, we are looking at trillion-dollar-plus deficits for the foreseeable future, as well as an estimated 151 percent debt-to-GDP ratio by 2048.

Corporate tax cuts. The TCJA cut the statutory tax rate from 35 percent to 21 percent, which is a 40 percent decrease. Yes, it is true that the corporate tax cut decreased corporate tax receipts by 31 percent. But a report from the Journal of Economic Perspectives projects that the corporate tax cut is more likely to contribute to increased capital investment (Auerbach, 2018). To play Devil's advocate, the Economic Policy Institute shows that TCJA has not had significant increases in non-residential fixed investment and non-defense capital goods.

The red herring of "tax cuts the rich": the TCJA helped Americans experienced tax cuts on net. The Tax Foundation found that 80 percent of taxpayers had a tax cut, whereas 15 percent did not experience a tax increase or decrease. Every income bracket in every congressional district saw a net decrease in taxes. A report from Heritage Foundation not only confirms this finding, but also found that the average household will have $26,000 in extra wages over the next decade.

This is important because those on the Left like to bring up how the those in the top tax brackets received such breaks while the lower quintiles hardly received anything. As I explained in my TCJA analysis earlier this year, that is because the U.S. has a progressive tax code that disproportionately puts the burden on the top quintile and one in which 47 percent of Americans do not pay federal income taxes.

Tax Code Not Simplified: More Tax Breaks. One of the accomplishments that the TCJA was supposed to achieve is simplifying the tax code, as House Speaker Paul Ryan promised when he said that most Americans could fill out their taxes on a form of the size of a postcard. One metric for that is the number of tax breaks. Before the TCJA, there were 216 tax breaks. Now there are 223 tax breaks (Peterson Foundation).

Repatriation: Inconclusive. Prior to the TCJA, earnings from foreign subsidiaries were not subject to the U.S. tax code unless they were paid to the parent company in the form of a dividend. The prior tax code essentially created disincentives for multinational companies to store their earnings in foreign subsidiaries. The TCJA lowered the barrier by imposing a one-time tax of 15.5 percent on liquid assets and 8 percent on illiquid assets. This is an improvement because such assets were subject to the pre-TCJA corporate tax rate of 35 percent. The Tax Foundation found that repatriation has brought more $464.4B into the U.S. in the first six months of 2018, which is more than in 2015, 2016, and 2017 combined. However, the reason this remains inconclusive is because it is indeterminable as to how much is due to current earnings and how much due to past earnings. The Federal Reserve expressed similar ambiguities in its September 2018 report.

SALT Deduction and Interstate Migration. The TCJA doubled the SALT deduction, but put a cap of $10,000 on the deduction. This means that high-income taxpayers will face more of the brunt of state and local taxes. In September, the Cato Institute released a report on how the State and Local Tax (SALT) deduction affect interstate migration. In short, the SALT deduction reform has incentivized those in higher-tax states to move to lower-tax states.

Economic Growth. The Tax Foundation predicts that the corporate tax cut will result in increasing the GDP by 1.7 percent, the long-term capital stock by 4.8 percent, the wage rate by 1.5 percent, and employment by 339,000 jobs over the next decade. Accounting and tax firm Ernst and Young also has positive expectations for the TCJA. For the first five years, EY expects GDP growth to be 1.2 percent higher. As for the next five years, it will be at a more modest 0.8 percent. In the grander scheme of things, EY expects the long-run GDP growth to be 0.2 percent. The Dallas Federal Reserve had similar findings on its near-term GDP growth.

Conclusion: There are many other factors to consider, including the mortgage interest deduction, the territorial system, and the repeal of the individual mandate for Obamacare. Since there is so much to cover, what I would like to do is keep an eye on the TCJA and see what the longer-term effects are.