The Tax Cuts and Jobs Act, as Reported by Conference Committee (12/15/17): Static and Dynamic Effects on the Budget and the Economy

Introduction

Penn Wharton Budget Model (PWBM) previously reported static analysis and dynamic analysis of the House Tax Cuts and Jobs Act (TCJA), as of November 5, 2017. That analysis was updated when the bill was changed by the 1st amendment and the 2nd amendment, and reported out of the Ways and Means Committee on November 9, 2017.

Penn Wharton Budget Model (PWBM) previously reported static and dynamic analysis of the Senate Tax Cuts and Jobs Act (TCJA), as of November 9, 2017. The bill was amended on November 15, 2017, thereby generating updates to static and dynamic analysis. Our static and dynamic analysis was also updated for amendments when the bill was passed by the Senate on December 2, 2017.

This brief reports our static and dynamic analysis for the bill reported by the conference committee on December 15, 2017. Readers are encouraged to read some of our previous analyses for related definitions used in this brief.

Conference Agreement

The TCJA would change U.S. individual, corporate, and international taxes.

For individuals, the bill would keep seven tax brackets with new rates. The top rate would be lowered from 39.6% to 37 percent and the exemption from the Alternative Minimum Tax (AMT) would be increased. The standard deduction would be roughly doubled and personal exemptions would be eliminated. For households who itemize deductions, the cap on the Mortgage Interest Deduction would be reduced to $750,000 in mortgage debt and up to $10,000 of State and Local taxes could be deducted. The Child Tax Credit would increase to $2,000, the amount refundable to $1,400 and begin to phase out at $400,000 of income. Households would be able to deduct 20 percent of the first $315,000 in income from pass-through businesses. The individual mandate for health insurance would be repealed and estate tax exemptions would increase. For individuals, many provisions would sunset in 2026.

For corporations, the bill would introduce a tax rate of 21 percent, down from 35 percent and eliminate the corporate AMT. The bill would extend, expand and then phase out bonus depreciation. The net interest deduction would be capped at 30 percent of income. For multinational corporations, a territorial tax system would be introduced with a deemed repatriation tax of eight percent for non-cash and 15.5 percent for cash assets.

Modeling Sunsets in the Dynamic Model

To maintain consistency with budget reconciliation requirements, the TCJA involves numerous major expiry of provisions (sunsets). However, in making those amendments, the bill’s creators announced that they expect that sunsetting provisions would eventually be extended. We, therefore, model the dynamic (economic) effects of the amended bill as households and investors expecting no sunsets prior to the sunset dates. However, to be consistent with the actual bill, the sunsets then unexpectedly expire as scheduled. This modeling approach is generally more favorable for generating positive growth relative to alternatives.

Revenue Effects: Static and Dynamic

PWBM reports the static effects on revenues with and without changes to federal outlays in Table 1. Including outlay effects is consistent with the Joint Committee on Taxation’s estimates, which finds that the TCJA reduces revenue by $1,456 billion from 2018 to 2027. PWBM’s static model projects that, including outlay effects, the bill reduces revenue by $1,968 billion over the first 10 years. Not including outlays, PWBM finds a $2,209 billion revenue loss over the first 10 years.

Between PWBM and JCT, there are considerable differences in the estimated costs of individual items, especially the individual AMT. These differences are due to several factors: interactions when changing multiple parts of the tax code at the same time; moderately different macroeconomic forecasts and parameters; and PWBM’s forecast of demographic changes compared to JCT’s focus on tax filers.