Economic Consequences of Extending Lapsed Provisions from the Tax Cuts and Jobs Act
The 2017 Tax Cuts and Jobs Act (TCJA) was a significant tax reform that brought about changes in various areas, including the creation of Opportunity Zone (OZ) tax incentives, lowering taxes for workers, families, and businesses, and shifting the United States from a worldwide tax system to a territorial tax system.
One of the key provisions of the TCJA was the 20% deduction for pass-through entities, prioritizing the health and vitality of small businesses. The act also doubled the child tax credit from $1,000 to $2,000 per child. These changes aimed to stimulate economic growth and improve the financial well-being of many American families.
However, if the TCJA provisions are extended beyond 2025, as proposed by the 2025 One Big Beautiful Bill Act (OBBBA), there are concerns about the long-term fiscal sustainability. The extension is estimated to result in a small but positive economic growth effect, with GDP growth projected to increase slightly over the next 20 years.
However, this growth is not enough to prevent a significant increase in federal deficits. The extension of the TCJA is estimated to lead to an increase in the 10-year federal deficit by about $3.7 trillion. The increases in debt and related interest payments partly counteract the economic benefits, worsening the long-run federal budgetary outlook.
Estimates from models such as the Penn Wharton Budget Model forecast a deficit increase of around $4.3 trillion over 10 years, with GDP growth between 0.4% (10 years) and 0.7% (30 years). It's important to note that the economic benefits are not evenly distributed, with the wealthiest receiving the largest share of benefits from the extended tax cuts.
If the TCJA provisions expire in 2025, there will be several consequences. Individual marginal tax rates will increase, the standard deduction will fall, the child tax credit will be cut in half, small businesses will lose the 20% pass-through deduction, businesses will have to deduct investment slowly over time, and distressed communities will see decreased investment from the disappearance of OZs.
In conclusion, while the TCJA has brought about some positive economic changes, the potential extension beyond 2025 could lead to a large increase in federal deficits and debt, raising concerns about long-term fiscal sustainability. It's crucial to consider these potential impacts when evaluating the TCJA's long-term effects on the economy.
[1] Committee for a Responsible Federal Budget (2019). The Economic Impact of Extending the TCJA Beyond 2025. [Link] [2] Joint Committee on Taxation (2019). Description of the Conference Agreement for H.R. 1, The Tax Cuts and Jobs Act. [Link] [3] Congressional Budget Office (2018). The Budget and Economic Outlook: 2018 to 2028. [Link] [4] Tax Policy Center (2017). The Distribution of the Tax Cuts and Jobs Act. [Link] [5] Penn Wharton Budget Model (2019). The Economic and Budgetary Effects of Making the Tax Cuts and Jobs Act Permanent. [Link]
- The economic growth effect of extending the Tax Cuts and Jobs Act (TCJA) beyond 2025 may slightly increase GDP over the next 20 years, but this growth is not enough to prevent a significant increase in federal deficits.
- The extension of TCJA is projected to lead to an increase in the 10-year federal deficit by approximately $4.3 trillion, with the interest payments on this increased debt worsening the long-run federal budgetary outlook.
- Estimates suggest that if the TCJA provisions expire in 2025, the wealthiest individuals and businesses could see a decrease in their tax burdens, with the largest share of benefits being received by the wealthiest.
