The House Tax Cuts and Jobs Act: Static Effect on Federal Tax Revenues

Key Points

  • On Thursday November 2nd, 2017 the Ways and Means Committee majority released the Tax Cuts and Jobs Act. The Act changes both individual and business taxes.
  • The Joint Committee on Taxation's (JCT) conventional (static) analysis finds that the bill lowers tax revenues by $1.414 trillion over 10 years.
  • Penn Wharton Budget Model's (PWBM) conventional (static) analysis finds that the bill lowers tax revenues by $1.750 trillion over the first 10 years and $4.391 trillion from 2018 to 2040.

The House Tax Cuts and Jobs Act: Static Effect on Federal Tax Revenues

Introduction

On November 2nd, 2017 the House Ways and Means Committee majority released the Tax Cuts and Jobs Act that would fundamentally change the U.S. tax system. This brief uses the Penn Wharton Budget Model (PWBM) to report the projected impact on the federal budget.

Tax Cuts and Jobs Act: Main Features

The Tax Cuts and Jobs Act (TCJA) reduces taxes on both individuals and businesses in addition to implementing international reforms. Tables 1 and 2 show the reforms that are included in TCJA and compares them to current policy.

For individuals, Table 1 shows that TCJA proposes to reduce the number of tax brackets from seven to four. For the current top tax rate of 39.6%, TCJA also increases the income threshold from $470,700 (married) to $1,000,000 while phasing out the bottom rate of 12 percent for those with income to which the top tax rate is applied. Table 1 shows that the bill also roughly doubles the standard deduction, repeals personal exemptions, repeals and limits itemized deductions, and expands the Child Tax Credit (CTC). The tax bill eliminates the alternative minimum tax (AMT). In addition, TCJA expands and then eventually eliminates the estate and gift tax threshold. Finally, owners of pass-through businesses would face a top rate of 25 percent on passive business income.

Table 1: Reforms to Individual Tax Provisions in the Tax Cuts and Jobs Act

Tax Provision Tax Cuts and Jobs Act Current Policy (2017)
Individual Taxes
Individual rate 12%, 25%, 35%, 39.6% 10%, 15%, 25%, 28%, 33%, 35%, 39.6%
Individual tax rate bracket thresholds 12% bracket: up to $45,000 (single), up to $90,000 (married) 10% bracket: up to $9,325 (single), up to $18,650 (married)
25% bracket: $45,000 to $200,000 (single), $90,000 to $260,000 (married) 15% bracket: $9,325 to $37,950 (single), $18,650 to $75,900 (married)
35% bracket: $200,000 to $500,000 (single), $260,000 to $1,000,000 (married) 25% bracket: $37,950 to $91,900 (single), $75,900 to $153,100 (married)
39.6% bracket: more than $500,000 (single), more than $1,000,000 (married) 28% bracket: $91,900 to $191,650 (single), $153,100 to $233,350 (married)
12% bracket phased out for high income taxpayers 33% bracket: $191,650 to $416,700 (single), $233,350 to $416,700 (married)
35% bracket: $416,700 to $418,400 (single), $416,700 to $470,700 (married)
39.6% bracket: more than $418,400 (single), more than $470,700 (married)
Standard deduction Standard deduction of $12,000 single, $24,000 married. Standard deduction of $6,350 single, $12,700 married.
Personal exemptions Repealed $4,050 each for taxpayer, spouse & dependents
Alternative Minimum Tax (AMT) Repealed, carryforward changed Yes
Index Chained CPI CPI
Itemized Deductions Limits repealed Subject to limits
        State and local income and sales taxes, medical expenses, tax preparation expenses, taxes not paid or accrued in a trade or business, personal casualty losses, expenses attributable to being an employee, moving expenses, contributions to medical savings accounts, educator expenses Repealed Yes
        State and local property taxes Up to $10,000 Yes
        Home mortgage-interest Up to $500,000 on new loans Up to $1M
        Charitable contributions Certain contributions are limited and repealed Yes
        Personal casualty losses for those affected by hurricanes Yes Yes
        Wagering losses Limited to wagering winnings Yes
        Alimony Payments Not deductible by payee nor income for payee Yes
Child Tax Credit (CTC) $1,600 per qualified child $1,000 per qualified child
$1,000 refundable portion would be indexed to chained CPI and not rise above $1,600 Refundable up to 15% of income over $3,000
$300 credit for non-child dependents, including the taxpayer, non-refundable, expires after 2022 No
Phase out income thresholds $115,000 (single) and $230,000 (married) Phases out at income of $75,000 (single), $110,000 (married)
Credit for adoption, elderly or disabled, electric motor vehicles, interest on certain home mortgages Repealed Yes
CTC, Earned Income Tax Credit (EITC), American Opportunity Tax Credit (AOTC) Work-eligible SSN required to claim refundable portion Yes
Education
AOTC, Hope Scholarship Credit (HSC), Lifetime Learning Credit (LLC) Credit for first $2,000 of certain higher education expenses, 25% of next $2,000, fifth year at 1/2 of the first 4, with $500 refundable Yes
Coverdell Accounts No new contributions to Coverdell accounts Contributions of $2000 per beneficiary
529 Plans Elementary and high school expenses up to $10,000 and apprenticeship programs will be qualified expenses, a child in utero may be a beneficiary Yes
Deduction for student loan interest, tuition and expenses and exclusion for savings bonds for education expenses, qualified tuition programs, employer-provided education programs, student loan forgiveness Repealed, changes made to student loan forgiveness Yes
Exclusions
Gain from sale of a principal residence Must be principal residence for 5 out of the previous 8 years, only used once every 5 years, phased out for high income Must be principal residence for 2 out of the previous 5 years
Employee achievement awards, dependent care assistance programs, moving expense reimbursement, adoption assistance programs, employer provided housing Repealed, employer provided housing limited & phased out for high income Yes
Pension Savings and Retirement Modifications, including to the minimum age for in-service contributions, hardship withdrawals and distributions, and the recharacterization of ROTH IRA contributions as traditional IRA contributions Yes

For businesses, Table 2 shows that TCJA reduces the corporate tax rate to 20 percent. The bill also allows full expensing for five years and limits the net interest deduction. In addition, certain business tax expenditures are repealed or limited.

Table 2: Reforms to Business, International, and Other Tax Provisions in the Tax Cuts the Jobs Act

Tax Provision Tax Cuts and Jobs Act Current Policy (2017)
Business Taxes
Corporate rate 20%, 25% for personal services corporations 15%, 25%, 34%, 39%, 34%, 35%, 38%, 35%
Corporate Alternative Minimum Tax (AMT) Repealed, carryforward changed 20% on income above $40,000
Deduction of investment expenses in the same year "full expensing" Allowed for 5 years & 179 expensing expanded Depreciation over time, some limits
Net interest deduction Capped at 30% of income, modifications including small business exemption Yes, subject to limitations
Certain business tax expenditures, including related to energy, insurance, net operating losses, bonds, compensation and small business accounting Repealed and modified Yes
Other Taxes
Pass-through rate Top rate of 25%, for certain income Individual income tax rates
        Prevent conversion of wage income to business income by wealthy individuals as a result of new pass-through rate Active owners pay individual rates on 70% of income from pass-through business or according to their "capital percentage", 25% rate does not apply to professional services pass-through businesses such as lawyers and financial services. No
        Determination of active ownership Based on number of hours spent participating in activities of the business No
Estate tax and generation skipping transfer tax Exclusion doubled and indexed for inflation, repealed after 2023, step-up in basis is unchanged Top tax rate is 40% with estates over $5.49 million (single), $10.98 million (married) subject to tax.
Gift tax top rate of 35%, exclusion is unchanged and indexed for inflation Yes
International Taxes
One-time repatriation rate 12% on cash, 5% non-cash, paid over 8 years No
Territorial tax system Yes Global tax system
Excise tax on certain payments from domestic corporations to related foreign corporations Choice to treat as connected income No
Other international reforms Repealed and Modified Yes
Exempt Organizations Modified Yes

For businesses that operate internationally, TCJA introduces a territorial tax system. The bill also allows for a special one-time repatriation rate for the previous profits of foreign subsidiaries. Finally, the bill includes a 20 percent excise tax on profits from domestic corporations that are subsidiaries of foreign corporations when profits leave the United States.

More information on the Tax Cuts and Jobs Act can be found at the House Committee on Ways and Means and in analysis by the Joint Committee on Tax.

Evaluation by Joint Committee on Tax

The Joint Committee on Tax (JCT), which is staffed by leading tax experts, estimates the revenue effects of congressional bills over a 10-year “budget window.” The base units are tax filers. JCT uses an individual tax model, a corporate tax model, an estate and gift tax model, multiple excise tax models, and many tax credit or exclusion models. Their conventional estimates capture the effects of tax planning, shifts between business types, and timing of income, consumption and investment.

Evaluation by Penn Wharton Budget Model

The Penn Wharton Budget Model also estimates the revenue effects of policy proposals, both over a 10 year “budget window” and over a longer time horizon (until 2040). PWBM uses a tax simulator with three integrated tax calculators: individual, corporate and international. The tax simulator operates on PWBM’s highly detailed micro-simulation and projection of the U.S. population’s demographic and economic characteristics as profiled in Census data. It uses a crosswalk between IRS data and the micro-simulation’s individuals and families to identify tax filers and their filing statuses. PWBM’s total revenue projections are based on making detailed tax calculations based on all relevant IRS forms and schedules and aggregating tax liabilities over individual tax filing units. Such a micro-based methodology captures the effects of projected changes in the future distributions of tax filers. Our tax simulator results also account for the effects of tax planning and shifts between business types.

Revenue Effects of the Tax Cuts and Jobs Act

PWBM’s conventional analysis finds that the Tax Cuts and Jobs Act will reduce federal revenue. Table 3 shows the revenue effects of TCJA over the 10 year budget window and over the long-run.

Table 3 compares revenue losses estimated by JCT and PWBM. PWBM estimates a static revenue loss from 2018 - 2027 equal to $1,750 billion, or about $336 billion more than that estimated by JCT. The difference in revenue losses are due to potentially several factors: moderately different macroeconomic forecasts and parameters; PWBM’s forecast of demographic changes, compared to JCT’s focus on tax filers; and, interactions when changing multiple parts of the tax code at the same time. From 2018 - 2040, PWBM estimates federal revenues will be $4,391 billion lower under the bill than otherwise.

Table 3: PWBM’s Conventional (Static) Estimates of the Effect of the Tax Cuts and Jobs Act on Federal Tax Revenues (Billions of Dollars)

Revenue Effect 2018-2027 Revenue Effect 2018-2040
Tax Provision JCT PWBM PWBM
Individual
      New tax rate and bracket structure -1,090 -1,323 -3,907
Expand the standard deduction and repeal personal exemptions 641 547 1,604
Index tax provisions to chained CPI 128 83 712
New tax rate and rules for pass-through businesses -448 -585 -1,942
Expand Child Tax Credit and new personal credit -640 -605 -1,230
Repeal and modifications to itemized deductions 1,261 1,022 3,481
Repeal Alternative Minimum Tax (AMT) 1 -696 -256 -831
Reforms to certain credits and deductions 2 82 52 145
Reforms to certain individual tax provisions 3 4 86 86 327
Estate Tax Repeal 5 -172 -171 -787
Subtotal -929 -1,150 -2,428
Corporate
New corporate tax rates and repeal of corporate Alternative Minimum Tax (AMT) -1,502 -1,393 -3,978
Deduction of investment expenses in the same year "full expensing" allowed for 5 years -25 -30 -30
Net Interest Deduction capped at 30% of income 172 152 453
Limit net operating loss deductions 156 108 142
Repeal of Domestic Production Deduction 95 100 274
Reforms to certain business tax expenditures 6 269 279 915
Subtotal -843 -784 -2,224
International 7
One-time repatriation rate 223 164 164
Other international reforms 8 55 20 97
Subtotal 285 184 261
TOTAL -1,414 -1,750 -4,391

Note: Estimates are net of effects on federal spending.

Conclusion

The Tax Cuts and Jobs Act would make many changes to both individual and business tax provisions. Penn Wharton Budget Model’s static analysis projects that the changes in the bill reduce federal tax revenue in both the short- and long-run.

[Text slightly updated on Nov 7 at 10:33am to clarify the integration of the tax calculator into the microsimulation model. No values have been changed.]


  1. PWBM's estimate of the revenue effect of repealing the individual AMT compared to baseline is $515 billion.  ↩

  2. Reforms to certain credits and deductions includes repeal of tax credits for elderly and disabled, repeal of the deduction for moving expenses, the educator expense deduction and student loan interest deduction and valid SSN required for refundable portion of CTC.  ↩

  3. For these items PWBM applies PWBM's macroeconomic forecast to JCT estimates.  ↩

  4. Reforms to certain individual tax provisions includes reforms to pensions, savings and retirement, certain exclusions, credits for adoption, electric motor vehicles and interest on certain home mortgages, valid SSN required for AOTC and work-eligible SSN required for EITC, reforms to tax expenditures related to education, reforms to tax exclusions and taxable compensation and reforms to tax exempt entities.  ↩

  5. For these items PWBM applies PWBM's macroeconomic forecast to JCT estimates.  ↩

  6. For these items PWBM applies PWBM's macroeconomic forecast to JCT estimates.  ↩

  7. PWBM's estimates include lower cross-border profit flows than JCT's.  ↩

  8. For these items PWBM applies PWBM's macroeconomic forecast to JCT estimates.  ↩