The Economic Impact of the Tax Cuts and Jobs Act

Parker Sheppard / David Burton / December 20, 2017

The Tax Cuts and Jobs Act, which is expected to be signed into law today, would reform the tax code by lowering federal marginal rates for most households, corporations, and small businesses.

We have revised our previous estimates of the House and Senate versions of the bill to reflect changes made by the conference committee. The final version of the Tax Cuts and Jobs Act reduces the corporate tax rate from 35 percent to 21 percent, temporarily reduces tax rates on many noncorporate (pass-through) businesses, and temporarily increases the present discounted value of capital cost recovery allowances for equipment.

We project that the final bill will increase the level of gross domestic product in the long run by 2.2 percent. To put that number in perspective, the increase in GDP translates into an increase of just under $3,000 per household. Though we only estimate the change in GDP over the long run, most of the increase in GDP would likely occur within the 10-year budget window.

For reference, we previously estimated that the House bill would increase GDP by 2.6 percent and that the Senate bill would increase GDP by 2.8 percent. The updated estimate reflects changes in the conference bill.

The primary differences between this estimate and the previous estimates are the failure of the conference bill to improve capital cost recovery allowances for structures and that the changes to individual income tax rates (including rates for pass-through businesses) expire after the 10-year budget window closes.

The final bill only temporarily changes the rules for expensing of new investment and the income tax rates for households. We calculated the effects of the bill both with and without the expiring provisions.

The headline estimate is the simple average of the two, which reflects business’ and households’ expectations that Congress may or may not allow the temporary provisions to expire. If the expiring provisions were made permanent, then the level of GDP would increase by 2.75 percent, while if the same provisions were to expire, the level of GDP would only increase 1.7 percent.

The changes in GDP occur because of increases in the capital stock and the number of hours worked. We estimate that the final bill would increase the capital stock related to equipment by 4.5 percent, and the capital stock related to structures by 9.4 percent. We also estimate that the number of hours worked would increase by 0.5 percent.

Methodology

Our estimates in this report reflect a corporate tax rate of 21 percent, an average marginal noncorporate tax rate of 22 percent, an increase in after-tax wages of 3.5 percent, and no change in the expensing rules for structures relative to current law. The rest of the estimate is detailed in our previous report on the House and Senate bills.