The Senate Tax Cuts and Jobs Act, Amended (11/15/17): Dynamic Effects on the Budget and the Economy

Summary

Penn Wharton Budget Model’s dynamic analysis projects that The Senate Tax Cuts and Jobs Act reduces federal tax revenue in both the short- and long-run relative to current policy. In the near term, there is a small boost to GDP, but that increase diminishes over time.

Key Points

  • This brief reports Penn Wharton Budget Model’s (PWBM) dynamic analysis of The Senate Tax Cuts and Jobs Act (TCJA), as amended with sunset provisions on November 15, 2017.

  • If the sunset provisions are allowed to expire as scheduled, including economic feedback effects, revenue falls between $1.3 trillion and $1.5 trillion over the 10-year budget window, ending in 2027. Debt increases between $1.4 trillion and $1.6 trillion, which is larger than the revenue losses due to additional debt service. By 2040, revenue falls between $1.1 trillion and $2.1 trillion, while debt increases by $1.7 to $2.4 trillion.

  • PWBM projects that GDP will be between 0.3 percent and 0.8 percent larger in 2027 relative to no tax changes. By 2040, GDP is projected to be between 0.2 percent and 1.2 percent larger.


The Senate Tax Cuts and Jobs Act, Amended (11/15/17): Dynamic Effects on the Budget and the Economy

Introduction

Penn Wharton Budget Model’s (PWBM) previously reported static and dynamic analysis of the Senate Tax Cuts and Jobs Act (TCJA), as of November 9, 2017. The bill was amended on November 15, 2017. We recently reported our static analysis of the amended bill, which includes the expiration of several provisions and changes to other tax provisions. This brief reports our dynamic analysis for the amended bill. Readers are encouraged to read some of our previous analyses for related definitions used in this brief.

Sunset Provisions

To maintain consistency with budget reconciliation requirements, the amended Senate TCJA involves numerous major sunsets (expiry of provisions), discussed in our static analysis of the amended bill. However, in making those amendments, the bill’s creators announced that they expect that the sunsetting policies would eventually be extended. We, therefore, model the amended bill as households and investors expecting no sunsets prior to the sunset dates. However, to be consistent with the actual amended bill, the sunsets then unexpectedly expire as scheduled. In general, this is an optimistic case for dynamic growth effects.

Budget Effects of the Tax Cuts and Jobs Act

Table 1 shows that over the 10-year budget window ending in 2027, the Senate Tax Cuts and Jobs Act is projected to reduce federal tax revenues between $1.3 trillion (high initial return to capital) to $1.5 trillion (low initial return to capital). Over this period, debt rises by more, by about $1.4 trillion to $1.6 trillion, due to debt services. By 2040, revenue falls between $1.1 trillion and $2.1 trillion, whereas debt increases by $1.7 trillion to $2.4 trillion.

Table 1: TCJA Effects on Revenue and Debt Relative to Current Policy 1

Cumulative Revenue (billions of $) Change in Debt (billions of $)
Static Dynamic Static Dynamic
Years High return to capital Low return to capital High return to capital Low return to capital
2018-2027 -$1,639 -$1,271 -$1,522 $1,608 $1,408 $1,555
2018-2040 -$2,448 -$1,096 -$2,083 $2,642 $1,740 $2,436

Note: The static estimate in this table focuses on the official definition of “revenue” and, therefore, does not incorporate outlays, including tax refunds. Our static analysis (Table 1) reports static analysis both inclusive and exclusive of outlays.

By 2027, notice that the static projection of debt actually rises slower than the static reduction in revenues, despite the cost of debt service. The reason is due to the repeal of the Affordable Care Act’s individual mandate, which is recorded as a reduction in outlays rather than an increase in taxes. As shown in our static analysis (Table 1), the change in revenues and outlays is about $300 billion smaller during the 10-year budget window than the change in revenue alone, and over $1.1 trillion smaller through 2040.

Economic Effects of the Tax Cuts and Jobs Act

The Senate Tax Cuts and Jobs Act has effects beyond federal revenues, including effects on GDP, labor income and U.S. capital services, which are summarized in Table 2. By 2027, GDP is between 0.3 percent and 0.8 percent larger than current policy in that year. However, this initial boost fades over time as more debt accumulates. By 2040, GDP is between 0.2 percent and 1.2 percent larger than current policy in that year.

The increase in debt by 2040 is only about one-third of the size that we previously projected for the House-version of the Tax Cuts and Jobs Act. However, the ultimate change in GDP is similar, although slightly higher in the case of “high return to capital” (1.2 percent versus 0.8 percent).The reason is that the lower debt in the long run for the Senate version is mostly achieved by sunsetting provisions that, if not deficit financed, would have encouraged economic growth.

Table 2: TCJA Effects on Key Macroeconomic Variables Relative to Current Policy in Year Shown

GDP (% change) Labor Income (% change) Capital Services (% change)
Year High return to capital Low return to capital High return to capital Low return to capital High return to capital Low return to capital
2027 0.8% 0.3% 0.8% 0.3% 2.4% 0.6%
2040 1.2% 0.2% 1.2% 0.2% 3.5% 0.5%

Note: Percentage change relative to current policy in 2027 and 2040, respectively. Consistent with our previous dynamic analysis and the empirical evidence, the projections above assume that the U.S. economy is 40 percent open and 60 percent closed. Specifically, 40 percent of new government debt is purchased by foreigners.

Table 2 shows changes in the level of GDP in the shown years relative to current policy. An alternative measure, as shown in Table 4, is to examine changes in the annual growth rate of GDP that is needed to produce the different levels shown in GDP. PWBM finds that over the next 10 years, average annual GDP growth will be 0.03 percentage points to 0.08 percentage points higher under TCJA than with no tax changes. However, from 2028 to 2040, average annual GDP growth will be 0.01 percentage points smaller to 0.03 percentage points larger than under current law, due to the effects of larger debt.

Table 3: TCJA Effects on Average Annual GDP Growth Relative to Current Policy over Period of Time Shown

Average Annual GDP Growth Rate (percentage point change)
Dynamic
Years High return to capital Low return to capital
2018-2027 0.08 0.03
2028-2040 0.03 -0.01

Note: Percentage point change relative to current policy from 2018-2027 and 2028-2040, respectively. Consistent with our previous dynamic analysis and the empirical evidence, the projections above assume that the U.S. economy is 40 percent open and 60 percent closed. Specifically, 40 percent of new government debt is purchased by foreigners.

Conclusion

Penn Wharton Budget Model’s dynamic analysis projects that The Senate Tax Cuts and Jobs Act reduces federal tax revenue in both the short- and long-run relative to current policy. In the near term, there is a small boost to GDP, but that increase diminishes over time.


  1. PWBM’s integrated model includes both revenue and spending policy. For our tax simulator, we model “current law” that allows tax provisions to expire as scheduled, consistent with JCT’s approach. For our spending side, we model “current policy” that does not, for example, allow changes to mandatory changes when, for example, the Social Security’s trust funds are exhausted. For debt calculations and dynamic analysis, this integration provides a more holistic analysis since some government benefit formulas, including the initial calculation of Social Security benefits upon retirement, are explicitly tied to the growth in average wages throughout a participant's lifetime.  ↩