The Senate Tax Cuts and Jobs Act, Amended (11/15/17): Comparing Dynamic Effects Estimated by PWBM & JCT

Summary

Penn Wharton Budget Model’s and Joint Committee on Taxation’s dynamic analysis projects that The Senate Tax Cuts and Jobs Act reduces federal tax revenue and boosts GDP by similar amounts. Both find that the boost to GDP produced by the tax cuts is not enough to pay for the tax cuts.

Key Points

  • This brief compares Penn Wharton Budget Model’s (PWBM) dynamic projections (which include economic feedback effects) of The Senate Tax Cuts and Jobs Act (TCJA) against the recent projections issued by the Joint Committee on Taxation. The results are substantially similar.

  • Both PWBM and JCT find that the Senate TCJA reduces tax revenues by about $1 trillion over the next 10 years, net of outlays. PWBM’s and TCJA’s 10-year revenue estimate (net of outlays and interest) differs by only $3 billion. Both PWBM and JCT project that the economy under the Senate TCJA plan will be 0.8% larger on average over the first 10 years relative to current policy.


The Senate Tax Cuts and Jobs Act, Amended (11/15/17): Comparing Dynamic Effects Estimated by PWBM & JCT

Introduction

Penn Wharton Budget Model (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 previously reported our static and dynamic analysis of the amended bill, which includes the expiration of several provisions and changes to other tax provisions. This brief reports our dynamic analysis, delivered on November 21, 2017, and the Joint Committee on Taxation’s (JCT) dynamic analysis for the amended bill, delivered on November 30, 2017. Readers are encouraged to read some of our previous analyses for related definitions used in this brief.

Budget Effects of the Tax Cuts and Jobs Act

Table 1 shows that over the 10-year budget window ending in 2027, both JCT and PWBM find that the Senate Tax Cuts and Jobs Act is projected to reduce federal tax revenues by about $1 trillion on a dynamic basis. Specifically, JCT finds a dynamic revenue loss (net of outlay changes) equal to -$1,007 billion. However, some of JCT’s dynamic revenue loss includes additional interest payments on new debt, whereas PWBM’s revenue measure focuses on a conventional 10-year revenue losses without additional interest payments. (The impact on national debt, which is a more general measure, is reported in our dynamic analysis of the amended bill.) Netting out these additional interest payments, JCT finds a 10-year revenue loss of -$956 billion, which is very close to PWBM’s estimate of -$959 billion.

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

Cumulative Revenue (billions of $), 2018-2027
Static Dynamic
High return to capital Low return to capital
JCT
Revenue Only -$1,633 N/A N/A
Revenue net of Outlay Changes -$1,414 -$1,007 N/A
PWBM
Revenue Only -$1,639 -$1,271 -$1,522
Revenue net of Outlay Changes -$1,327 -$959 -$1,210

Note: The JCT dynamic estimates include $51 billion of increased interest payments on the Federal debt due to the response of monetary policy. PWBM uses a stochastic OLG model to produce dynamic results while JCT uses a weighted combination of related models (MEG, DSGE and OLG). Changes to outlays includes tax refunds and the effects of eliminating the individual mandate for health insurance.

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, which are summarized in Table 2.

Table 2: TCJA Effects on GDP Relative to Current Policy in 2027

GDP (% change), 2027
High return to capital Low return to capital
JCT 0.8% N/A
PWBM 0.8% 0.3%

Note: Consistent with PWBM’s previous dynamic analysis and the empirical evidence, PWBM 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. JCT reports their GDP (% change) as the average increase in GDP levels across the next 10 years. On this basis, PWBM and JCT closely match as well since most of the gain during the first decade is due to foreign capital flows that occurs fairly quickly.

Conclusion

Penn Wharton Budget Model’s and Joint Committee on Taxation’s dynamic analysis projects that The Senate Tax Cuts and Jobs Act reduces federal tax revenue and boosts GDP by similar amounts. Both find that the boost to GDP produced by the tax cuts is not enough to pay for the tax cuts.


  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.  ↩