On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (TCJA). These changes represent the most drastic changes to ever happen to the Internal Revenue Code (IRC) since 1986. TCJA was implemented objectively to overhaul the IRC. President Trump campaigned four main adjectives: tax relief for the middle-class, simplification of the tax code, American economic growth, and no additional debt added to the government’s deficit.
United States Secretary of the Treasury, Steven Mnuchin on various occasions made clear the Tax Cuts and Jobs Act will generate enough revenue in the next ten years to cover the massive tax cuts given to corporations as incentives. This research will focus on the effect TCJA will have on economic growth to pay for itself in future years.
It is expected that the majority of growth happen in the next two years due to business investment, increased consumer and government spending. A lower tax rate for individuals increases spending and investments, creating a more efficient economy, increasing opportunity and development in local and state economies.
The Harrod–Domar model is a classical Keynesian model of economic growth used in development economics projections to explain an economy’s growth rate in terms of the level of saving and productivity of capital. The model states when increased savings occur, increased investments follow, which leads to a higher capital stock creating and higher economic growth. The use of the Harrod-Domar model would conclude that as we shrink Corporate tax from a 35 percent to 21 percent, corporations would be incentivized to expand the workforce through the creation of new jobs because of the increase of investments, which will lead to an expansion in spending by consumers. These factors taking place will create a booming stock market scenario, furthermore, economic growth is inevitable. In the first quarter of 2018 after TCJA was signed into law, real GDP grew at a rate of 2.3 percent, 0.6 percent down from a 2.9 from the last quarter of 2017. President Trump assured following the implementation of Tax Reform the GDP will grow at a rate of 3.0 percent. The first quarter of 2018 did not perform as expected. Real GDP is expected to increase at 2.4 in 2019 and 1.8 percent in 2020. The CBO estimates future GDP growth would not offset the deficit of 11.7 trillion for 2018 to 2027.the deficit is expected to rise steadily in the next 10 years, and by 2028 fiscal debt will reach almost 100 percent of GDP. If Congress votes to keep the individual provisions set to expire in 2025, the deficit will grow even larger (The budget & economic outlook).
The Joint Committee on Taxation estimated a 10 years revenue loss of 1.456 trillion of dollars from 2018 to 2027. The committee also estimated a GDP increase of 0.8 percent over the ten years due to the creation of jobs and investments. Three economic models were used by the committee: the macroeconomic equilibrium growth, the overlapping generations, and the dynamic stochastic general equilibrium model to determine economic implications during the 10-year mark of the TCJA. However, the CBO (Congressional Budget Office) concluded the deficit would be even more overwhelming to the economy as the calculations would increase the deficit by 20 percent. The CBO issued sources and estimations of ten different studies of the impact of TCJA on the US economy in the next 10 years.
The Congressional Budget Office (CBO) projected an increase in tax revenues from Individual income tax, Payroll tax and Corporate for Fiscal Year 2018. The increase was predicted to rise to 3,604 billion dollars as a result of the effects of TCJA. The actual tax revenue reported for FY2018 totaled 3,329 billion dollars, representing a 7.6 percentage decline from the projected revenue. Corporate Income Tax revenue declined by 39.7 percent to the predicted amount. A similar pattern holds for Income Tax revenue and Payroll Tax revenue.
The government’s annual income only pays for 77% of spending. It creates a $1.1 trillion billion budget deficit (thebalance.com). As Congress continues implementing stimulus spending policies to create jobs instead of using deficit spending to broad economic surplus, the federal deficit increases every fiscal year. Congress should consider strategies to solve spending and tax revenue discrepancies. The fact that Congress is spending 133% of tax revenue influx should be alarming to the country. Perhaps, federal budgets are a thing of the past.
It’s been 16 months since the introduction of TCJA, another premise in which the new tax reform was proposed is simplicity for taxpayers to file forms and schedules in a simple and more stress-free format. While the new 1040 form format looks definitely simpler and shorter, many new schedules were introduced with tax reform. Furthermore, the process of filing might have become simplified for some taxpayer. However, the tax preparation process for most taxpayer was not affected by the simplicity proposed. The TCJA seems to create substantial tax benefits for some households with low income, or households with dependents, however, other households may not feel a significant saving impact in their personal finances.
TCJA has been very controversial in the last 2 years due to alarming figures with the increased federal deficit and catastrophic consequences to the US economy according to experts in the media. As today Tax Cuts and Jobs Act isn’t paying for itself. However, it might shortly if corporate tax cuts fulfill its purpose, which was to boost the economy by creating more jobs and investments. The biggest benefits of TCJA created points to corporations and trying to control and direct that economic incentive is out of taxpayers and the government reach. Ultimately, we end up at the mercy of big corporations and whether or not they decide to save us all.
- Peer Reviewed Articles
- Slemrod, J. (2018). Is This Tax Reform, or Just Confusion? Journal of Economic Perspectives, 32(4), 73-96. doi:10.1257/jep.32.4.73
- Tax Reform and its broad spectrum, which in this article the author compares the 1986 Tax Reform to 2017 Tax reform. The actual environmental economic challenges that greatly differ from the last tax reform from 1986. The article provides extensive analysis of changes to the Corporate Tax changes and Individual Income Tax changes as well.
- Gathje, J. (2018). Analysis of the Tax Cuts and Jobs Act Relative to President Donald Trump’s and Speaker Paul Ryan’s Stated Goals (Master’s thesis, University of Nebraska at Omaha) (pp. 1-74). DigitalCommons@UNO. doi:https://digitalcommons.unomaha.edu/cgi/viewcontent.cgi?article=1031&context=university_honors_program
- Congressional Budget Office. (n.d.). Retrieved from https://www.cbo.gov/
- Amadeo, K. (2019, May 18). Who Really Pays Uncle Sam’s Bills? Retrieved from https://www.thebalance.com/current-u-s-federal-government-tax-revenue-3305762
- The Budget and Economic Outlook: 2018 to 2028. (n.d.). Retrieved June 17, 2019, from https://www.cbo.gov/publication/53651
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