The U.S. Tax Cut and Jobs Act

Transcription

1 The U.S. Tax Cut and Jobs Act A Brief Economic Analysis Joshua Greene Visiting Professor SMU Research Seminar, Feb. 9, 2018

2 Presentation Outline Main provisions of the Act Estimated distributional impact of the tax reductions Possible macroeconomic consequences Summary 2

3 I. Main Provisions of the Act Changes in individual income tax provisions (all expire after 2025) Changes in business and corporate tax provisions Elimination of the insurance mandate under the Affordable Care Act ( Obamacare ) 3

4 Changes in Individual Income Taxes Changes in tax rates and brackets NB: Rates apply to incomes above the stated levels: 10% on all taxable income from $0 to $19,049 for joint filers, for example. Source: Lee Financial, Summary of Tax Cuts and Jobs Act Changes, December 26,

5 Changes in Individual Taxes, cont. Changes in exemptions and standard deduction Personal exemptions ($4,050 in 2017, reduced for taxpayers with incomes above $261,500 [$313,800 for married couples filing jointly]) have been eliminated Standard deductions have nearly doubled for most taxpayers Source: Lee Financial, Summary of Tax Cuts and Jobs Act Changes, December 26,

6 Changes in Individual Taxes, cont. Changes to other deductions: many are reduced The new ceilings on deductions for state and local taxes, along with the increases in the standard deduction, are projected to cause many taxpayers to switch from itemizing (claiming deductions) to claiming the standard deduction. The ceilings particularly affect upper-middle income taxpayers in states with state and local taxes considered high (e.g., New York, Calif., New Jersey, Maryland) and moderate (e.g., Michigan, Virginia). Source: Lee Financial, Summary of Tax Cuts and Jobs Act Changes, December 26,

7 Changes in Individual Taxes, cont. Expansion of the Child Tax Credit Source: Lee Financial, Summary of Tax Cuts and Jobs Act Changes, December 26,

8 Changes in Individual Taxes, cont. Modification of the Alternative Minimum Tax Estate and Gift taxation: basic exemption is doubled to $10 million. Source: Lee Financial, Summary of Tax Cuts and Jobs Act Changes, December 26,

9 Changes in Individual Taxes: Business Income This provision is expected to cause some skilled professionals to create businesses to be able to benefit from the 20% deduction. It may not apply to U.S. citizens and permanent residents living overseas. Sources: Lee Financial, Summary of Tax Cut and Jobs Act Changes, December 26, 2017; and Blank Rome, Tax Cuts and Jobs Act Overview of Provisions, December 21, 2017; Americans Abroad Hit by Trump s New Repatriation Tax Rules, Financial Times, Feb. 5,

10 Changes in Corporate Income Taxes Corporate tax rate cut to a flat 21% from previous 35% maximum Corporate alternative minimum tax of 20% (with $40K deduction) repealed Movement toward a territorial tax system (NB: DRD = dividend received deduction ) for dividends received after One-time repatriation tax of 15.5% on previously un-repatriated earnings The tax applies to any U.S. citizen or permanent resident holding 10% or more of a controlled foreign corporation (50+% controlled by U.S. shareholders) with un-repatriated profits and must be paid within 8 years, even if profits remain outside the U.S. Excise tax of 1.4% imposed on investment income of private universities with at least 500 tuition-paying students (50% or more located in the U.S.) and assets of more than $500,000 per student Sources: Lee Financial, Summary of Tax Cut and Jobs Act Changes, December 26, 2017; Blank Rome, Tax Cuts and Jobs Act Overview of Provisions, December 21, 2017; Americans Abroad Hit by Trump s New Repatriation Tax Rules, Financial Times, Feb. 5,

11 Corporate Tax Changes, cont. Immediate depreciation of some investments; Limit on interest deductions Tax-free like-kind exchanges limited to real estate (e.g., excludes art) Change in rules for excessive employee compensation Source: Blank Rome, Tax Cuts and Jobs Act Overview of Provisions, December 21,

12 II. Distributional Consequences During , most households receive tax cuts. Cuts become proportionately larger as income rises, with most cuts going to the top 1% of taxpayers. From 2026 onward many households face tax increases, as the individual cuts expire and provisions revert to pre-2018 law. Higher-income households still receive some cuts, on average, because of incidence of corporate shareholding and pass-through firms (pass-through firms involve mostly upper-income taxpayers). 12

13 Average Impact of Tax Cuts by Income Group, According to Tax Policy Center Simulations 13

14 Distributional Impact of Tax Cuts and Jobs Act: 2018 Source: TPC Staff, Distributional Analysis of the Tax Cut and Jobs Act, Tax Policy Center, December 18,

15 Distributional Impact of Tax Cuts and Jobs Act: 2025 Source: TPC Staff, Distributional Analysis of the Tax Cut and Jobs Act, Tax Policy Center, December 18,

16 Distributional Impact of Tax Cuts and Jobs Act: 2027 Source: TPC Staff, Distributional Analysis of the Tax Cut and Jobs Act, Tax Policy Center, December 18,

17 Estimates of Those Gaining and Losing from Law: 2018 Source: TPC Staff, Distributional Analysis of the Tax Cut and Jobs Act, Tax Policy Center, December 18,

18 Estimates of Those Gaining and Losing from Law: 2025 Source: TPC Staff, Distributional Analysis of the Tax Cut and Jobs Act, Tax Policy Center, December 18,

19 Estimates of Those Gaining and Losing from Law: 2027 Source: TPC Staff, Distributional Analysis of the Tax Cut and Jobs Act, Tax Policy Center, December 18,

20 Estimated Effects on Representative Households: Married Couple with Moderate Income, Two Children TPC Staff, Updated Effects of the tax Cuts and Jobs Act on Representative Families, December 22,

21 Estimated Effects on Representative Households: Married Couple, No Children, Upper-Middle Income TPC Staff, Updated Effects of the tax Cuts and Jobs Act on Representative Families, December 22,

22 Estimated Effects on Representative Households: Higher-Income Married Couple, No Children TPC Staff, Updated Effects of the tax Cuts and Jobs Act on Representative Families, December 22,

23 Estimated Distributional Impact, JCT Ests.:

24 Estimated Distributional Impact, JCT Ests.:

25 Estimated Distributional Impact, JCT Ests.:

26 Estimated Distributional Impact of Bill, cont. According to the Joint Committee on Taxation, after including the business tax cuts, only those with incomes above $75,000 are projected to gain from the proposal from 2027 onward, with the largest gains benefitting the top taxpayers. 26

27 Average Impact of Law on Taxpayers by Income Level: Tax Policy Center Estimates Source: Sarlin, B., Republican-led Congress passes sweeping tax bill, NBC News, December

28 III. Macroeconomic Impact of the Law Most analyses anticipate some gains in growth and GDP during the first few years of implementation. Real gains may be small afterward, because U.S. is estimated to have reached potential output by late 2017 (see graph) Federal Reserve Board may tighten policy further in response, to limit inflation Law is projected to increase ratio of federal debt to GDP Estimate of U.S. Output Gap through Q Source: U.S. Bureau of Economic Analysis, as shown in FRED, Federal Reserve Bank of St. Louis. 28

29 Projected Macroeconomic Impact Tax Policy Center projects the law will raise real GDP by 0.8 percent in 2018 and progressively less through 2026, with little impact afterward. IMF projects that the law will have a cumulative growth impact of 1.2 percent by 2020 and negative effects (relative to previous law) from 2022 onward, offsetting some earlier gains, with little effect on inflation. Joint Committee on Taxation estimates avg. growth impact at 0.1 pct./year Sources: Page, B., and others, Macroeconomic Analysis of the Tax Cuts and Jobs Act, December 20, 2017; IMF, World Economic Outlook Update, January 22, 2018; Committee for Responsible Federal Budget, Official Analysis Finds Tax Bill Will Produce Marginal Growth, Cost $1.1 Trillion, January 3,

30 Projected Impact of Law on Deficit Tax Policy Center estimates that law will raise U.S. deficit by cumulative US$1.27 billion during Joint Committee on Taxation estimates cost after macroeconomic feedback at US$1.1 trillion over same period Source: Page, B., and others, Macroeconomic Analysis of the Tax Cuts and Jobs Act, December 20, 2017; Committee for Responsible Federal Budget, Official Analysis Finds Tax Bill Will Produce Marginal Growth, Cost $1.1 Trillion, January 3,

31 Projected Impact of Tax Law on Federal Debt: Congressional Budget Office: No Macro. Effects 31

32 Projected Impact of Law on Federal Debt Service and Debt: Tax Policy Center Source: Page, B., and others, Macroeconomic Analysis of the Tax Cuts and Jobs Act, December 20,

33 Summary Tax Cut and Jobs Act makes substantial changes to U.S. federal tax law Tax cuts for most households during , with largest cuts for high-income taxpayers Individual income taxes revert to pre-law status as of 2026 Significant cuts in corporate taxes, move toward territorial taxation Although most households benefit initially, largest gains go to top HHs Macroeconomic impact of law is projected as limited (1.2 to 2.0 percent cumulative gain through 2020), with little increase after 2026 Law is projected to raise cumulative federal deficit by US$ trillion during Law is projected to raise federal debt/gdp held by public by 6.3 percentage points in 2027 to about 97.5 percent without macroeconomic feedback and 5.5 percentage points, to about 96.7 percent with feedback 33