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Tax Cuts and Jobs Act Will Cost $1.5 Trillion

Nov 2, 2017 | Taxes

According to House Ways and Means Committee Chairman Kevin Brady (R-TX), today's Tax Cuts and Jobs Act will add $1.51 trillion to the debt, before accounting for interest or possible gimmicks. This cost would likely be enough to cause debt to exceed the size of the economy by 2028 – bad news for the nation's fiscal and economic future.

Of the $1.5 trillion cost, roughly $1 trillion comes from business tax cuts. Individual tax cuts make up another $300 billion, and the ultimate repeal of the estate tax accounts for the remaining $200 billion.

Within the business cuts, the legislation would reduce the corporate tax rate from 35 to 20 percent ($1.5 trillion), allow companies to fully deduct the cost of business investments in the year they are made through 2022 ($25 billion), and limit the top rate on certain pass-through business income paid on the individual side to 25 percent ($448 billion).  These provisions are partially offset by tax base-broadening provisions, including reducing the limit on interest deductions ($172 billion), eliminating the domestic production activities deduction ($95 billion), limiting carryover of net operating losses ($156 billion), eliminating the orphan drug tax credit ($54 billion), and eliminating private activity bonds ($39 billion). The business tax reform plan also includes a number of international changes which generate modest positive revenue, a one-time tax on foreign-held earnings of U.S. corporations ($223 billion), and a number of smaller provisions.

On the individual side, the plan would consolidate individual income tax rates to four brackets of 12, 25, 35, and 39.6 percent ($1.1 trillion) and repeal the Alternative Minimum Tax, or AMT ($696 billion). To pay for these changes, it would repeal the state and local income and sales tax deductions, limit the property tax deduction, limit the mortgage interest deduction and reform or repeal various other itemized deductions ($1.3 trillion). The legislation would also reform higher education benefits ($65 billion) and repeal or reform a number of smaller tax breaks. Finally, the legislation would repeal the personal exemption in favor of a larger standard deduction, a larger child tax credit, and a new $300 per person tax credit; these provisions would be roughly neutral when taken together, though the $300 per person credit would expire after 5 years and continuing it would increase costs.

The proposal would also roughly double the exemption for the estate tax immediately and ultimately repeal it starting in 2024 ($172 billion).

Policy Ten-Year Cost/Savings (-)
Individual Tax Cuts
Consolidate and reduce individual income tax rates $1.1 trillion
Roughly double the standard deduction $921 billion
Repeal the Alternative Minimum Tax (AMT) $696 billion
Increase the child tax credit and create a new filer and dependent credit $640 billion
Subtotal, Individual Tax Cuts $3.3 trillion
Individual Tax Increases
Repeal personal exemptions -$1.6 trillion
Reform itemized deductions -$1.3 trillion
Reform higher education tax benefits -$68 billion
Eliminate certain exclusions -$37 billion
Other provisions -$41 billion
Subtotal, Individual Tax Increases -$3.0 trillion
Business Tax Cuts
Reduce corporate tax rate to 20% and repeal corporate AMT $1.5 trillion
Limit pass-through top tax rate to 25% or 35% $448 billion
Move to territorial system for foreign taxation $207 billion
Move to full expensing of investments for five years $25 billion
Increase small business write-offs $41 billion
Other provisions $22 billion
Subtotal, Business Tax Cuts $2.2 trillion
Business Tax Increases
Enact base erosion or other revenue-raising provisions for foreign taxation -$287 billion
Enact one-time tax on overseas earnings -$223 billion
Reduce limit on interest expense deductions -$172 billion
Limit carryover of net operating losses -$156 billion
Eliminate domestic production activities deduction -$95 billion
Eliminate orphan drug tax credit -$54 billion
Reform tax treatment of insurance companies -$40 billion
Eliminate private activity bonds -$39 billion
Eliminate entertainment expense deduction -$33 billion
Reform tax treatment of executive compensation -$29 billion
Other changes -$79 billion
Subtotal, Business Tax Increases -$1.2 trillion
Repeal the Estate Tax $172 billion
Total $1.5 trillion

Source: Joint Committee on Taxation via the Ways and Means Committee.

Even the $1.5 trillion cost disguises two provisions that arbitrarily sunset after five years. The bill provides full expensing of investments and the $300 filer and dependent credit for only five years. Since the House leadership hasn't provided any rationale why these provisions would be temporary and the economic case for temporary expensing in the current economic environment is quite small, it seems likely that the expiration date is intended to artifically reduce the cost of this bill and set up a costly extension later.

A bill that adds $1.5 trillion to the debt is bad news for the budget. The bill will only accelerate the growth of debt over the next decade and beyond and make it much harder to put debt on a sustainable path.