Key Points
Contrary to simpler models---which do not incorporate the impact of federal debt on GDP, wages and interest rates---making the TCJA business tax “extenders” permanent does not promote economic growth more than making these tax cuts temporary, even when measured in the long run, unless the TCJA business tax “extenders” are funded.
However, permanent TCJA business tax “extenders” could dominate if they were financed using more efficient offsetting tax increases or enough spending cuts. This brief considers a combination of options, including sunsetting the individual tax “extenders” in 5 or 8 years while making spending cuts permanent. Even so, even more financing is needed for permanent TCJA business tax extenders to dominate temporary ones.
In a separate analysis, we show the cost savings from not extending the individual tax for high income taxpayers.
Budget Reconciliation Options with Permanent Business Tax Extenders
The 2017 Tax Cuts and Jobs Act (TCJA) includes provisions that will phase out or expire by the end of 2025. The Trump Administration proposes "TCJA extenders" to restore the 100 percent bonus depreciation deduction, allow immediate deduction of research costs, return the net interest expense limit to 30 percent of EBITDA, and maintain current tax rates on GILTI and FDII.
These provisions affect business investment and know-how, crucial to economic growth. A permanent extension, if fully funded, generally promotes more long-term growth than a temporary one. Temporary extensions cause businesses to shift investments earlier to benefit from lower taxes, without increasing overall investment, which is inefficient.1
The funding is essential; permanent extensions are less effective if financed by debt. Several “liberal” and “conservative” groups routinely advocate for spending increases or tax cuts using “free-money models” that do not properly incorporate the effects of increased public debt on capital formation, GDP, and wages. These same models would also predict that economic growth could be maximized by eliminating all taxes, as the economic impact of mounting federal debt is ignored.
Table 1 reports the conventional budgetary effects of different expiration date options for business taxes, household taxes, and spending cuts. The business tax provisions include the TCJA business and international tax provisions described in our earlier analysis of President Trump’s tax proposals. The household tax provisions include the TCJA individual & estate tax provisions, income taxes on Social Security benefits, income taxes on tips, income taxes on overtime pay, the SALT deduction cap, and the treatment of carried interest. Government spending cuts include those outlined by the House Budget Committee in House Concurrent Resolution 14.
Scenarios #1 and #2 serve as benchmarks from our earlier analysis: if all tax cuts are allowed to expire at the end of 2033 and the spending cuts are permanent, deficits over the 10-year budget window increase by $5.1 trillion; if the tax cuts and spending provisions are permanent, deficits over the budget window would increase by $6.0 trillion.
| Scenario # | Business tax provisions | Personal income tax provisions | Government spending cuts | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | 2025 - 2034 |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 1 | expire end of 2033 | expire end of 2033 | permanent | -69 | -675 | -697 | -681 | -651 | -625 | -625 | -628 | -643 | 179 | -5,115 |
| 2 | permanent | permanent | permanent | -69 | -675 | -697 | -681 | -651 | -625 | -625 | -628 | -643 | -660 | -5,954 |
| 3 | permanent | expire end of 2033 | permanent | -69 | -675 | -697 | -681 | -651 | -625 | -625 | -628 | -643 | 7 | -5,287 |
| 4 | permanent | expire end of 2030 | permanent | -69 | -675 | -697 | -681 | -651 | -625 | -13 | 169 | 182 | 191 | -2,870 |
| 5 | permanent | expire end of 2033 | expire end of 2033 | -69 | -675 | -697 | -681 | -651 | -625 | -625 | -628 | -643 | -275 | -5,570 |
| 6 | permanent | expire end of 2030 | expire end of 2030 | -69 | -675 | -697 | -681 | -651 | -625 | -253 | -87 | -88 | -91 | -3,917 |
| Memorandum: | ||||||||||||||
| Changes in government spending in our model | ||||||||||||||
| Medicaid | -62 | -63 | -65 | -67 | -70 | -73 | -77 | -81 | -83 | -87 | -729 | |||
| SNAP | -18 | -18 | -19 | -20 | -20 | -21 | -22 | -23 | -23 | -24 | -208 | |||
| Other spending reduction | 150 | 111 | -72 | -90 | -108 | -127 | -142 | -152 | -163 | -171 | -765 | |||
| Target changes in government spending by Committees | ||||||||||||||
| Medicaid (Energy and Commerce Committee: Medicaid $780 billion, $100 billion other spending) | -880 | |||||||||||||
| SNAP (Agriculture Committee) | -230 | |||||||||||||
| Other spending reduction | -592 | |||||||||||||
Notes:
Business tax provisions include the TCJA business and international tax provisions.
Personal income tax provisions include the TCJA individual & estate tax provisions, income taxes on Social Security benefits, income taxes on tips, income taxes on overtime pay, the SALT deduction cap, and the treatment of carried interest.
Government spending cuts include those outlined by the House Budget Committee (see House Concurrent Resolution 14). We assume that reductions in Medicaid funding shift a greater share of costs to states, cuts to SNAP payments decrease resources available to low-income households, and other spending reductions either lower public infrastructure investments or are considered cuts to unspecified government spending. Our model attributes $937 billion of the $1,010 billion targeted by the Energy and Commerce and the Agricultural Committees to Medicaid and SNAP and the remaining $73 billion as cuts in unspecified government spending.
Source: Penn Wharton Budget Model
Scenarios #3 through #6 consider various combinations with permanent business tax provisions, temporary personal income tax provisions, and permanent of or permanent spending cuts. Scenarios #3 and #4 assume permanent cuts in spending but differ in their sunset of individual tax provisions. Scenario #4 is the cheapest over 10 years due to individual tax cuts expiring in five years, at the end of 2030. Scenarios #5 and #6 demonstrate the impact of permanent cuts in spending; making spending cuts temporary raises the 10-year cost by $1 trillion between the cheapest Scenario #4 and Scenario #6.
The conventional analysis above distributes cuts in mandatory outlays based on the distribution of spending under each committee’s jurisdiction. As we discussed in our previous analysis, for modeling the economic impact of the tax cuts within budget reconciliation, a decision must be made about how cuts in mandatory spending are distributed within each committee’s jurisdiction at the actual program level. The distribution matters in our model since we explicitly model the impact of these programs at the household level, which captures potentially large differences in marginal propensity to consume and other heterogeneity.
Herein, we allocate almost $780 billion of the $880 billion in deficit reductions from the Energy and Commerce Committee as coming from reduced Medicaid’s cost sharing with states, with about another $100 billion going to cuts to spending on energy, the environment, and other areas. We assume that the Agriculture Committee cuts would fall primarily on SNAP, while the Education and Workforce Committee cuts would take the form of reduced investment in education and workforce development. We model these cuts as specific programmatic changes, which is how they would be implemented in practice. Hence, the cash flows from our model, shown in the Memorandum in Table 1, differ slightly from the budget resolution. To be clear, the current House budget reconciliation does not make these specific recommendations. Rather, this version is again a comparison point until reconciliation legislation is introduced.
Scenario #1
Business tax provisions expire in 2033
Personal income tax provisions expire in 2033
Government spending cuts are permanent
| 2034 | 2039 | 2044 | 2049 | 2054 | |
|---|---|---|---|---|---|
| Gross domestic product | 0.4 | 0.5 | 0.4 | 0.3 | 0.2 |
| Capital stock | 1.2 | 1.1 | 1.0 | 0.8 | 0.7 |
| Hours worked | 0.4 | 0.4 | 0.4 | 0.4 | 0.4 |
| Average wage | 0.6 | 0.5 | 0.4 | 0.3 | 0.2 |
| Consumption | 0.8 | 0.7 | 0.6 | 0.5 | 0.5 |
| Debt held by the public | 10.4 | 6.4 | 3.7 | 1.7 | 0.1 |
Scenario #2
Business tax provisions are permanent
Personal income tax provisions are permanent
Government spending cuts are permanent
| 2034 | 2039 | 2044 | 2049 | 2054 | |
|---|---|---|---|---|---|
| Gross domestic product | -0.3 | -0.5 | -0.8 | -1.2 | -1.7 |
| Capital stock | -1.1 | -1.3 | -1.8 | -2.6 | -3.6 |
| Hours worked | 1.0 | 0.9 | 0.7 | 0.7 | 0.6 |
| Average wage | -0.7 | -0.7 | -0.9 | -1.3 | -1.8 |
| Consumption | 2.2 | 2.3 | 2.3 | 2.2 | 1.9 |
| Debt held by the public | 12.9 | 16.1 | 18.1 | 19.4 | 20.3 |
Scenario #3
Business tax provisions are permanent
Personal income tax provisions expire in 2033
Government spending cuts are permanent
| 2034 | 2039 | 2044 | 2049 | 2054 | |
|---|---|---|---|---|---|
| Gross domestic product | 0.0 | -0.2 | -0.4 | -0.7 | -1.0 |
| Capital stock | 0.5 | 0.0 | -0.5 | -1.0 | -1.6 |
| Hours worked | 0.2 | 0.2 | 0.2 | 0.2 | 0.2 |
| Average wage | 0.3 | 0.1 | -0.1 | -0.4 | -0.7 |
| Consumption | 0.9 | 0.8 | 0.6 | 0.4 | 0.2 |
| Debt held by the public | 11.1 | 9.6 | 8.5 | 7.5 | 6.8 |
Scenario #4
Business tax provisions are permanent
Personal income tax provisions expire in 2030
Government spending cuts are permanent
| 2034 | 2039 | 2044 | 2049 | 2054 | |
|---|---|---|---|---|---|
| Gross domestic product | -0.1 | -0.2 | -0.4 | -0.6 | -0.8 |
| Capital stock | 0.1 | -0.2 | -0.5 | -0.9 | -1.4 |
| Hours worked | 0.3 | 0.3 | 0.3 | 0.3 | 0.3 |
| Average wage | 0.1 | 0.0 | -0.2 | -0.4 | -0.6 |
| Consumption | 0.6 | 0.5 | 0.4 | 0.3 | 0.1 |
| Debt held by the public | 7.7 | 6.7 | 5.9 | 5.3 | 4.7 |
Scenario #5
Business tax provisions are permanent
Personal income tax provisions expire in 2033
Government spending cuts expire in 2033
| 2034 | 2039 | 2044 | 2049 | 2054 | |
|---|---|---|---|---|---|
| Gross domestic product | -0.2 | -0.5 | -0.8 | -1.1 | -1.6 |
| Capital stock | 0.1 | -0.5 | -1.2 | -2.0 | -3.0 |
| Hours worked | -0.3 | -0.3 | -0.4 | -0.4 | -0.4 |
| Average wage | 0.2 | -0.1 | -0.4 | -0.8 | -1.2 |
| Consumption | 1.1 | 1.0 | 0.8 | 0.6 | 0.3 |
| Debt held by the public | 11.5 | 11.5 | 11.5 | 11.6 | 11.6 |
Scenario #6
Business tax provisions are permanent
Personal income tax provisions expire in 2030
Government spending cuts expire in 2030
| 2034 | 2039 | 2044 | 2049 | 2054 | |
|---|---|---|---|---|---|
| Gross domestic product | -0.3 | -0.5 | -0.8 | -1.1 | -1.5 |
| Capital stock | -0.3 | -0.8 | -1.3 | -2.0 | -2.8 |
| Hours worked | -0.3 | -0.3 | -0.3 | -0.3 | -0.4 |
| Average wage | 0.0 | -0.2 | -0.5 | -0.8 | -1.1 |
| Consumption | 0.8 | 0.7 | 0.6 | 0.4 | 0.2 |
| Debt held by the public | 9.0 | 9.4 | 9.7 | 10.0 | 10.2 |
Notes:
Business tax provisions include the TCJA business and international tax provisions.
Household tax provisions include the TCJA individual & estate tax provisions, income taxes on Social Security benefits, income taxes on tips, income taxes on overtime pay, the SALT deduction cap, and the treatment of carried interest.
Government spending cuts include those outlined by the House Budget Committee (see House Concurrent Resolution 14). We assume that reductions in Medicaid funding shift a greater share of costs to states, cuts to SNAP payments decrease resources available to low-income households, and other spending reductions either lower public infrastructure investments or are considered cuts to unspecified government spending.
Source: Penn Wharton Budget Model
Table 2 shows the economic impact by Scenario. Compare Scenarios #1 and #4: Scenario #1 is $2.2 trillion more expensive over 10 years (Table 1). That is true even though Scenario #1 includes the effects of “timing shift,” where some of the revenue reduction from bonus depreciation is recaptured in later years, where firms would have otherwise still been depreciating investments under current law.
But that cost difference between Scenarios #1 and #4 is measured over the normal 10-year budget window. Table 2 shows that by the year 2054, Scenario #1 barely changes the size of federal debt on a dynamic basis relative to the value it would otherwise be in 2054 relative to current law. In contrast, Scenario #4 increases federal debt by an additional 4.7 percent. While the economic differences between Scenarios #1 and #4 in 2054 are not large, Scenario #4 still produces a small decline by 2054 relative to current law. More financing is still needed for permanent business tax extenders to add to economic growth relative to temporary.
Felix Reichling produced this analysis under the direction of Kent Smetters. Ed Murphy and Brendan Novak contributed to the analysis. Mariko Paulson prepared the brief for the website.
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The revenue loss from a timing shift must be financed with higher taxes elsewhere or more debt. Timing shifts are also inefficient because firms often invest in less efficient opportunities. Any investment incurs convex adjustment costs at a point in time, and future investment is often planned based on predictions of advances in the technological frontier over time. ↩
