The current U.S. statutory corporate tax rate is 35 percent. However, due to various deductions, credits and income deferral strategies, most corporations pay a lower rate, known as the effective tax rate (ETR), which averages about 23 percent under current law across all industries over the next decade. However, this value varies considerably across industries, with mining paying 18 percent and agriculture paying 33 percent.
The TCJA reduces the statutory corporate tax rate from 35 to 21 and the average ETR falls from 21 to 9 percent in 2018. However, by 2027, the ETR doubles in value to 18 percent, mostly due to expiring provisions.
In the short run, the biggest winners of the TCJA are capital-intensive industries like utilities, real estate and transportation, which benefit the most from temporary expensing of equipment. However, over time, several industry ETR’s will actually rise above the new statutory rate of 21 percent in future years.
By 2027, under our standard economics assumptions, we project that GDP is between 0.6 percent and 1.1 percent larger, relative to no tax changes. Debt increases between $1.9 trillion and $2.2 trillion, inclusive of economic growth.
By 2040, we project that GDP is between 0.7 percent and 1.6 percent larger under our baseline assumptions, and debt increases by $2.2 to $3.5 trillion.
Under standard assumptions, the traditional measure indicates that in 2019, 33 percent of the reduction in taxes in the Senate plan accrues to households in the top one percent of the income distribution. By 2027, this group receives almost 43 percent of the tax change and, by 2040, 48 percent.
In contrast, the share of taxes paid by households in the top one percent of the income distribution is only moderately lower under the Senate TCJA. Under current policy, the top one percent will pay 28 percent of federal income taxes by 2027, rising to 30 percent by 2040 due to increasing progressivity over time under current policy. Under TCJA, their tax share falls to 26 percent by 2027 and returns to 28 percent by 2040.
By 2040, the top one percent will pay a slightly larger share of the nation’s tax base under TCJA relative to what they pay today under current policy, although both figures round to 28 percent.
By 2027, under our standard economics assumptions, GDP is projected to be between 0.5 percent and 1.0 percent larger, relative to no tax changes. Debt increases between $1.8 trillion and $1.9 trillion, inclusive of economic growth.
By 2040, GDP is projected to be between 0.4 percent and 1.2 percent larger under our baseline assumptions, and debt increases by $2.6 to $3.1 trillion.
Additional sensitivity analysis indicates that even under assumptions favorable to economic growth, by 2027, GDP is projected to be between 1.0 percent and 1.9 percent larger, and debt increases between $1.5 trillion and $1.8 trillion.
In a recent podcast and article “The White House Budget: What’s the Reality” by Knowledge@Wharton, the latest budget proposal by the White House was discussed by Kent Smetters (Wharton), Alan Auerbach (UC Berkeley), and David Kamin (NYU).
The Wharton Executive MBA (WEMBA) program will be hosting a panel discussion on the recent federal tax reform and how it might affect businesses, which will feature our Faculty Director, Kent Smetters, along with two leading tax experts.
Though the event is only open to WEMBA students, we will live stream the discussion on our page for the event for anyone interested in watching. A recording will also be made available on that page after the event.