Foundation

JCT Lowballs Economic Impact of Tax Reform

by Demian Brady / /

On the plus side, the Joint Committee on Taxation’s dynamic analysis of the Senate’s Tax Cuts and Jobs Act found that the legislation would create growth. Unfortunately, because it bakes flawed assumptions into its model, JCT sees anemic growth—especially when compared with other projections of stronger economic growth under tax reform.

JCT estimated that GDP would grow by “about 0.8 percent on average over the 10-year budget window. That increase in income would increase revenues, relative to the static estimate of a loss of $1,414 billion, by $458 billion over that period."

This falls far short of the projections made by other think tanks and economists of the Senate bill:

  • The Heritage Foundation estimated 2.8 percent GDP growth.
  • In an open letter to Secretary Mnuchin published in the Wall Street Journal, several economists projected that by reducing the cost of capital, the "Republican [tax reform] bills could boost GDP by 3% to 4% long term.”

  • The Tax Foundation’s model sees 3.7 percent growth.

J.D. Foster, Chief Economist at the Chamber of Commerce shows that the JCT has gradually adjusted its models over the years, but still falls short in terms of accuracy. This is because of continued reliance on faulty assumptions that cause its model to underreport growth under reforms to reduce the cost of capital. Yesterday, the Tax Foundation pointed out some of the major remaining flaws in the assumptions JCT uses, including that the U.S. functions as a closed economy.

Faster growth means more jobs and higher income, which in turn results in higher offsetting revenues. A new dynamic analysis of the Senate bill by the Interindustry Forecasting at the University of Maryland and Quantria Strategies finds that the increase in growth “gains back about 55 percent of the static revenue loss through the personal tax side. … Dynamic calculations estimate a corporate tax revenue loss of $512, gaining back about 27 percent of the static revenue loss. [Emphasis added.]”

The economy has the potential to grow even higher in the later years, if the temporary provisions in the tax reform bills are extended. JCT’s dynamic score sees new revenues peaking at $56.1 billion in 2025, then shrinking to $37.7 billion in 2027. In order to remain compliant with the Senate’s Byrd rule, several provisions in the bill are scheduled to expire. JCT’s last line-by-line static revenue analysis of the Senate bill on November 17 identified 37 expiring provisions. The repeal of the Alternative Minimum Tax (which may be cut before final passage), the increased estate tax exemption, and the reduced individual rates and increased standard deduction are set to sunset at the end of 2025.

Tax reform is hard enough to accomplish, it shouldn’t be held up by faulty projections that shortchange economic growth and leave money off the table.


}