Should the 2017 Trump Tax Cuts Be Extended?

The 2017 Trump Tax Cuts, known as the Tax Cuts and Jobs Act (TCJA), brought sweeping tax changes, increased individual take-home pay, and reduced corporate effective tax rates.

But should the cuts be extended?

That is the question lawmakers will grapple with in the upcoming tax legislation showdown.

And it will certainly be debated in the upcoming presidential election.

The House Ways and Means Committee claims when the tax cuts expire in 2026, the average family of four making $75,000 will see their taxes increase by $1,500. Businesses will face a 43.4% tax rate and the estate tax will hit small businesses, farms, and ranches hard.

Whether the tax cuts should be extended largely relies on economic impact.

Let’s explore it.

Extending the Trump Tax Cuts Will Add Trillions to the National Deficit

If the Trump tax cuts are extended for the next 10 years, the Congressional Budget Office (CBO) estimates the decision would add $4.6 trillion to the deficit. This is estimated to be $1.1 trillion more than the CBO’s previous cost estimate of $3.5 trillion.

Additionally, extending the Trump tax cuts would create a $112.6 billion windfall for the top 5% of income earners.

The richest 5% of Americans would reap 40% of the benefits in the first year alone.

The Tax Foundation estimates $3.7 trillion would be added to the deficit and the nation’s debt-to-GDP ratio would increase from a projected 231.8% baseline to between 247.9% and 251.8%.

There is no doubt about it – the 2017 Trump Tax Cuts are indeed expensive.

Pro-growth tax cuts often create initial deficits that are recovered over time with economic expansion. If a tax cut is not pro-growth, it will permanently reduce tax revenues.

Were the 2017 Trump tax cuts pro-growth?

Impact of the Trump Tax Cuts to our Economy, Deficit, and Tax Revenues

Due to the complexity of our tax system, and how tax revenues have evolved since the Trump tax cuts were enacted, it is almost impossible to assess the 2017 TCJA’s direct impact on federal revenues and the economy.

Originally, the Tax Foundation estimated the 2017 TCJA would grow the GDP by 1.7%, wages by 1.5%, and add 339,000 jobs. Additionally, they projected that lowering the corporate tax rate to 21% would grow GDP by 2.6%.

The chart below shows the CBO’s baseline projections of federal revenues with an overlay of the Tax Foundation’s projection of the impact of the 2017 TCJA. As you can see, revenue takes an initial dip but recovers to a break-even point around 2023 and then exceeds the baseline in 2024 due to economic expansion.

The next chart shows actual revenue with an updated projection adjusted for inflation.

As you can see, revenue surpassed expectations but has dipped below baseline recently. Long-run revenues are expected to be slightly below the baseline with the accumulated deficit being ~$220 billion.

This could suggest that the Trump tax cuts did not play as large a role in expanding the economy as originally anticipated. The idea being, had the cuts sufficiently expanded the economy, tax revenue would be above baseline.

Conflicting Information from Committees

The Committee for a Responsible Federal Budget (CRFB) released a report showing that the 2017 TCJA will increase the deficit by $1.9 trillion over 10 years.

The House Budget Committee responded in turn by pointing out that in the first six years after enactment of the TCJA, federal revenues are ~$1 trillion higher than originally projected.

Is either report right?

The problem is our tax revenues have evolved since the passing of the 2017 TCJA which makes any actual analysis challenging. It also makes revenue projections difficult to pull off, and trust.

Since the 2017 Trump tax cuts, we’ve had a pandemic, conflict in the Middle East, the Ukraine/Russia war, and a growing trade war.

Congress has implemented massive spending and we have new legislation such as the CHIPS Act and the Inflation Reduction Act.

Trying to tie actual results to the Trump tax cuts will be heavily debated but we should all be skeptical of both parties’ claims.

How Extending the Trump Tax Cuts Affects the Economy

If every provision in the 2017 TCJA is extended, the Tax Foundation estimates:

• Change in GDP: 1.2%
• Change in capital stock: 1.3%
• Change in wages: 0.5%
• Change in jobs: +829,000

But as mentioned earlier, the Tax Foundation also projects 10-year tax revenues to decrease by $3.7 trillion excluding interest costs.

The Center on Budget and Policy Priorities (CBPP) claims that the Trump Tax cuts to increase the deficit by $3.9 trillion and makes an argument that the cuts should end for anyone making over $400,000 in an effort to claw back revenues.

In reality, the most prudent course of action would be to focus on extending tax cuts that are the most pro-growth, such as reduced corporate tax rates and business expensing (bonus depreciation and R&D).

These changes can encourage investment, spur economic growth, and enable us to recover the early deficit created by the tax cuts over a longer period of time.

Summary

Congress is currently spending $1.7-2 trillion more than it collects in tax revenue.

Extending all the Trump tax cuts will boost the economy but will result in an increased 10-year deficit to the tune of $3.7 trillion.

As lawmakers begin extension talks, special consideration should be paid to the cuts that can permanently boost the economy and the cost of those cuts.