The Congressional Research Service report on TCJA is not encouraging
The Tax Cuts and Jobs Act (TCJA) was passed in 2017 by Trump administration and it has been more than a year since this act became a law. It has been widely claimed by the proponents of this law that the tax cuts this law brings into force will pay for itself by stimulating the American economy. However, as per a Congressional Research Service report, the TCJA had little impact on the overall economy of the US in the year 2018. The findings of this report came as a little surprise to several independent analysts who had predicted that the law would have a negligible economic impact. On the other hand, the supporters of TCJA are pointing to the shortcomings of this Congressional Research report that was released in May 2019 by commenting that TCJA never really promised economic growth in the short-term.
As per this research paper, the tax cuts didn’t provide any significant economic benefit and just considerably lowered the effective corporate tax rates generating a huge magnitude of dividends for shareholders. Instead of TCJA paying for itself, the paper points out that it reduced the federal revenue by nearly $170 billion in the Fiscal Year 2018. Bearing in mind a different perspective, it must be pointed out that that there are several factors that influence the economic growth and it may have happened that the current trade policy or the deficit spending may have offset the benefits of the tax cuts.
TCJA is unlikely to pay for itself
Considering the other claim made by the supports of TCJA that the law will pay for itself by stimulating long-term economic growth, it is at the best made on optimistic projections made by the Trump administration. The administration is projecting average real economic growth of at least 3 percent per year till 2024, and 2.8 to 2.9 percent growth per year till 2029. These claims are based on assumptions that there will be rollbacks in labor regulations, $1 trillion infrastructure plan will take off and further tax cuts will be sanctioned. To know more about the Tax Cuts and Jobs Act, you can click here.
Is President Trump being too optimistic?
Looking at the viewpoint held by independent economists, they are highly skeptical of the economic projections made by the administration. They point out to the fact that the Federal Reserve has reduced its 2019 growth projection to 2.1 percent from 2.3 percent and is pointing out to a slowdown in the future growth projections. The critics of TCJA also give the example of tax cuts made by President George Bush in the early 2000s. Even at that time, it was clearly visible that the tax cuts didn’t bring in enough revenue to pay for themselves. And the same phenomenon is repeating with the TCJA, with the tax cuts failing to pay for themselves.
TCJA supporters point out to the long-term benefits
If the supporters of the tax cuts are to be believed, as per them, over the first year or two after its enactment, the TCJA is likely to boost the economy by raising the demand for goods and services. Due to the tax cuts on individual incomes, most of the households will have more after-tax income and this can create more spending in the economy. Additionally, the economic output is likely to experience an upswing due to the various business-friendly measures enacted in this law. The short-term effects of TCJA are likely to be limited by tightening of the monetary policy, as the Federal Reserve is likely to increase interest rates to cut back inflation.
Considering a long-term impact, the TCJA is likely to influence the economy due to increased incentives to work, save and invest. Due to the reduction in the individual tax rates, workers will have enough money in their hands, encouraging them to work more hours and attract new entrants into the labor force. Besides, with the corporate tax rate being cut, it will influence businesses positively and lead to more investment, larger capital stock and consequently a higher economic output.
The territorial tax system has benefitted American businesses
Another important sector in which the TCJA is likely to have a major positive impact is the shift to a territorial tax system. Due to this, the US-based multinational corporations will have now to pay income taxes just against their earnings within the US, contrary to a corporate tax on their worldwide earnings. This provision makes the US-based companies more competitive compared with other developed nations. As per the supporters of TCJA, before this law was enacted, the US-based multinational corporations used to resort to a practice called ‘corporate inversion’, due to which the parent company of the multinational would be domiciled outside the US to avoid the worldwide tax system. This adversely impacted the economy and encouraged other avoidance strategies by the corporations. However, with the shift to a territorial tax system due to the TCJA, the capital flows are now back to the US.
A positive impact of TCJA is likely to boost the US economy, and this will result in lower unemployment and increased payroll activities by businesses. To cater to this increased payroll activity, CPAs use payroll software to leverage various advantages.
Having considered the perspectives from both the proponents and the opponents of TCJA, it becomes clear that due to the tax cuts, the fiscal deficit is going to inflate and there is no visible economic data that can in the short-term attribute economic growth due to the tax cuts. Considering the long-term economic impact of TCJA, it hinges on further tax cuts and sustained public spending, not taking into account the highly unpredictable nature of the global economy that can have a negative impact on the domestic economy. The American people have put their hopes on a positive economic climate, impacting their lives positively and the TCJA addresses this in the short term by giving them more spending power in the form of individual tax cuts.