Summary
PWBM estimates that “Tax Reform 2.0” will lose $614 billion in revenue over the next 10 years, lose $3,831 billion in revenue by 2040, and slightly contract the economy, by about 0.6 percent to 0.9 percent by 2040.
Key Points
- Recently, the House Ways and Means Committee introduced “Tax Reform 2.0” that includes new incentives to start up a business, enhanced savings accounts and makes permanent the individual tax cuts in the 2017 Tax Cuts and Jobs Act.
In April of 2018, PWBM anticipated and estimated the effects of the largest piece of this legislation that makes the TCJA individual tax cuts permanent.
This brief updates that analysis for the new 10-year budget window and incorporates the rest of the provisions in “Tax Reform 2.0.”
Analysis of “Tax Reform 2.0”
Introduction
Recently, the House Ways and Means Committee introduced a set of legislation under the flag “Tax Reform 2.0”. The legislation is broken into three pieces:
Start-up deduction: H.R. 6756, expands the deduction allowance for start-up costs associated with new business by allowing a larger deduction for organizational costs and the transfer of credits in the case of an ownership change.
Enhanced savings accounts: H.R. 6757, modifies rules associated with retirement savings, including removes barriers for employers to offer retirement plans, creates new tax advantaged savings accounts, and allows for increased savings by older individuals and for education.
Making the Tax Cuts and Job Act (TCJA) individual tax cuts permanent: H.R. 6760, extends permanently the individual provisions of The Tax Cuts and Jobs Act that are set to expire in 2025.
Previous Analysis
In our previous brief, released in April of 2018, PWBM anticipated and estimated the effects of the third piece of this set of legislation that makes the TCJA individual provisions permanent. That estimate summarized revenue effects for the 10-year budget window, between 2018 - 2027, as as well as over the longer period 2018 - 2040.
This brief updates that estimate for the new 10-year budget window, between 2019 - 2028, as well as 2019 - 2040. This brief also incorporates all of the Tax Reform 2.0 provisions, including the start-up deduction and enhanced retirement savings. As such, we provide the first non-governmental analysis of the entire Tax Reform 2.0 package, as estimated by the government’s tax experts at the Joint Committee on Taxation (see their analysis for H.R. 6756, H.R. 6757 and H.R. 6760). The JCT projects a slightly larger revenue loss over the next 10 years and does not provide an estimate for years beyond 2028.1
Updated Analysis
Table 1 shows that PWBM estimates that Tax Reform 2.0 will cost $614 billion in lost revenue over the next 10 years on a conventional (or “static”) basis. The lion’s share of that lost revenue comes from making the TCJA individual tax cuts permanent. However, there is considerable cost beyond the budget window. We project a conventional revenue loss of $3,831 billion between 2019 and 2040, and so about 84 percent of the entire revenue loss comes after 10 years.
| Tax Provision | Revenue Effect 2019-2028 (billions of $) |
Revenue Effect 2019-2040 (billions of $) |
|---|---|---|
| New tax rate and bracket structure | -557 | -3,825 |
| Expand the standard deduction and repeal personal exemptions | 203 | 1,291 |
| New pass-through business deduction | -187 | -1,158 |
| Pass-through business loss limits | 72 | 487 |
| Expand Child Tax Credit (CTC) and new non-child dependent credit | -225 | -1,307 |
| Modifications to itemized deductions | 248 | 1,845 |
| Increase Alternative Minimum Tax (AMT) exemption phaseout threshold | -158 | -1,077 |
| Reforms to certain deductions and credits | 11 | 66 |
| Double estate tax exemption | -21 | -205 |
| Universal Savings Accounts (USA) | -7 | -20 |
| Expansion of Deduction for Start-Up costs | -4 | -12 |
| Other changes | -12 | -44 |
| TOTAL (with Outlay Effects) | -638 | -3,959 |
| REVENUE (Total without Outlay Effects) | -614 | -3,831 |
Note: Effects on federal outlays include tax refunds. Reforms to certain credits and deductions includes requiring Social Security numbers for for each child to claim refundable portion of CTC and repeal of the moving expense deduction.
Incorporating Dynamic Effects
As noted, both of these measures are conventional estimates that do not incorporate the dynamic effects on the economy from the provisions in Tax Reform 2.0. Table 2 of our previous brief, however, showed that making the TCJA individual tax cuts permanent actually lost more revenue on a dynamic basis than on a static basis, that is, these tax cuts produced a negative dynamic score. The reason is that a permanent reduction in income taxes is less stimulating to economic growth than, for example, spending the same amount of revenue on a reduction to effective business tax rates, which was the main focus of the original TCJA. At the same time, extending the individual tax cuts generates a considerable amount of additional debt that creates a drag on capital formation. The net effect is that the economy actually grows less (see Table 4 in our previous analysis) after this tax cut rather than more.
The first two provisions in the Tax Reform 2.0 are intended to provide additional incentives to grow the capital stock by encouraging new business formation and grow savings. But they are too small to make a meaningful impact to the economy relative to making the individual tax cuts permanent. Moreover, from an incentive basis, Universal Savings Accounts are less additive to the economy than first meets the eye. The previous evidence suggests that a considerable amount of savings in tax-deferred retirement plans were not new but merely represented a shift of savings from taxable plans.
Consistent with our previous analysis, we continue to project that Tax Reform 2.0 will, therefore, reduce GDP by 2040 between 0.6 percent and 0.9 percent relative to current law (which includes the original TCJA law passed December, 2017).
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Traditionally, the JCT reports “TOTAL (with Outlay Effects),” as shown in our Table 1, whereas PWBM tends to focus on the more conventional “REVENUE” line shown in Table 1. For comparison, JCT reports a “TOTAL (with Outlay Effects)” revenue loss of $657 billion, compared to our estimate of $638 billion. ↩
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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 spending 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. ↩