Two Years of TCJA

Sunday is the second anniversary of the signing of the Tax Cuts and Jobs Act (TCJA). In some ways, we know a great deal about the TCJA and its impact, but in others, it is simply too soon to make any judgements about the law’s effectiveness. 

First, let’s start with what we do know. We know the law dramatically cut taxes for most Americans. An estimated 80 percent of Americans had their taxes cut in the first year due to this law, with only five percent paying more due to the changes. The rate cuts, the expanded child tax credit, the changes to the alternative minimum tax, among others, resulted in broad tax changes. Taxpayers across the country and income spectrum paid less in taxes due to the TCJA.  

We know that taxes are simpler for many because of the law too. A study by NTUF Research Director Demian Brady estimated that Americans spent 71 million hours fewer in 2018 complying with the tax code than they did before reform, modestly reducing their out of pocket tax preparation costs along the way too. An estimated 90 percent of Americans now use the standard deduction (which was almost doubled by the TCJA), meaning their tax filing process is relatively straightforward. 

The law also improved American competitiveness. The corporate tax rate fell from 35 percent, highest in the industrialized world, to 21 percent, closer to the average. The full expensing provisions eliminated an inherent bias in the tax code which punished companies that wanted to purchase capital equipment.

But even given all of these changes and certainties, there is much that we don’t know about the law’s economic impact. During the debate on TCJA, every major tax scorer estimated the economic impact of the law’s components. While the groups debated about the magnitude of the impacts, all agreed on the direction: GDP, in the long run, should be larger than if the TCJA hadn’t been adopted. 

Opponents of the law argue that the TCJA has been a failure, but their certainty is unwarranted: it is simply too soon to have a comprehensive picture of the law’s economic effects. Supply-side changes, like a cut in the corporate tax rate and the expensing of capital investment, take years to manifest. Companies can’t invest overnight. Planning and permitting takes time. Once an investment is made, it can take a while for productivity to increase and the economy to expand.

Additionally, in many instances, the Treasury department is only now finishing the regulatory process to implement many of these changes. The TCJA overhauled the taxation of international income. These highly technical provisions impact every U.S. company that does business overseas, and the regulators have taken their time to craft things carefully. Companies need certainty, and many have waited out the open regulatory questions before moving too quickly. It’s hard to proclaim victory or defeat when tax rules are only weeks old

The President’s overzealous rhetoric at adoption of TCJA hasn’t aided public perception of the law, and his trade war will likely ensure that it underdelivers. Enacting tariffs immediately after signing generational tax reform is not a way to solidify positive economic results.  

Even if the Treasury could have snapped its fingers and issued guidance immediately, and the President hadn’t burdened the U.S. with tariffs, analyzing TCJA’s impact would still be difficult. All modeling estimates contain an important economic assumption: ceteris paribus, a Latin phrase meaning “all else being equal.” Those predictions assume nothing changes, but the U.S. economy keeps moving and outside factors continue changing. Economic data is noisy, gyrating month-to-month and quarter-to-quarter. In other words, we don’t have a time machine to investigate an alternate timeline where TCJA didn’t pass. All we have is econometric analysis to help explain what we think its impacts were. Thus, pointing to a single data point simply can’t answer the question conclusively.

It’s often said that nothing is certain in life but death and taxes. About TCJA, nothing is certain but that it passed and that it reduced tax bills significantly. For economic impacts and the rest of its effects, we must patiently wait.