The TCJA One Year Later
Sunday, Jan. 6, 2019 8:00 AM - 10:00 AM
- Chair: Alan J. Auerbach, University of California-Berkeley
Macroeconomic Effects of the 2017 Tax Reform
AbstractThis paper uses a cost of capital framework to analyze the long-run steady state and transition path for GDP as a result of the 2017 tax law. For the law as written, the long-run increase in corporate productivity would be 2.5 percent, which translates into a 0.4 percent increase in GDP after ten years—or an increase in the growth rate of 0.04 percentage point per year. If the 2019 provisions of the law are made permanent, these numbers would be 4.7 percent for long-run corporate productivity, 1.2 percent for GDP after ten years, and 0.13 percentage point increase in the growth rate. The paper does sensitivity analysis, including finding that if interest rates rose as a result of fiscal crowd out the tenth year GDP increases would be 0.2 percent and 1.0 percent for the two scenarios respectively. The paper assesses the short-run impact of the 2.3 percentage point reduction in average marginal tax rates under the law, which would be associated with a 0.9 percentage point increase in the annual growth rate for 2018-19—although the magnitude of the impact could differ from the historical pattern based on the specific tax changes and the economic situation.
How Much Do C Corporations Benefit from the TCJA? Estimates of Average and Marginal Effective Tax Rates by Industry
AbstractThe Tax Cuts and Jobs Act of 2017 (TCJA) substantially reduced taxes on both individuals and business. While considerable attention has been paid to the distribution of the tax cut across households, much less has been paid to heterogeneity in the legislation’s impact on C corporations. Using a novel dataset constructed from IRS tabulations of corporate income tax returns, this paper provides estimates of average and marginal effective corporate tax rates by industry and size, before and after passage of the TCJA. The TCJA reduced the U.S. statutory corporate tax rate from 35 percent to 21 percent. However, few C corporations pay the statutory rate, as deductions, credits, and income deferral strategies allow most to pay a lower rate, called the effective tax rate. A comparison of average effective tax rates pre- and post-TCJA reveals that not all industries benefit equally from the changes. The differential effects are due to industry utilization of certain preferences that the TCJA either eliminated or curtailed. A comparison of the marginal effective tax rates on investment pre- and post-TCJA reveals substantial differences not only across industries but also between equity- and debt-financed investments.
Modeling the Internal Revenue Code in a Heterogeneous-Agent Framework: An Application to TCJA
AbstractMacroeconomic models used for tax policy analysis often simultaneously abstract from two features of the US tax code: different tax treatment for different types of capital income, and the joint tax treatment of ordinary capital and labor income. In this paper, we explore the extent to which explicitly accounting for this tax interdependence has macroeconomic implications within a heterogeneous-agent model. We do this by expanding the Moore and Pecoraro (2018) model to include distinct corporate and non-corporate firms so that the business income distributed to households can be separated into ordinary and preferred capital income. Household income tax treatment is then determined by an internal tax calculator that fully accounts for interaction among income bases while conditioning on idiosyncratic household characteristics. Relative to a conventional approach where household income taxation is determined by independent labor and capital income tax functions that do not distinguish between ordinary and preferred capital income, we find that the choice of tax system has implications for household behavior, tax revenue, factor income, and other aggregate variables when analyzing a subset of tax provisions from the recently enacted “Tax Cuts and Jobs Act”. Our findings imply that the abstracting from tax detail may come at the expense of correctly accounting for incentives and estimating macroeconomic responses.
- H2 - Taxation, Subsidies, and Revenue