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.

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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.]

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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.  ↩