How Has the Tax Cuts and Jobs Act Affected the US Economy?
The economy saw increases in 2018
Critics of President Donald Trump’s tax plan to significantly reduce business and personal taxes warned that the cuts would send the deficit skyrocketing by dramatically shrinking federal revenues. The Tax Cuts and Jobs Act (TCJA) reflecting President Trump's plan was ultimately signed into law on Dec. 22, 2017. It went into effect on Jan. 1, 2018.
A study by economists at Deutsche Bank AG before the TCJA became the law indicated that the overall impact of President Trump’s tax cuts should be between historical ditches and should not elicit so much angst and fear. In fact, the report said, its impact would be in line with the tax cuts made by two other Republican Presidents: Ronald Reagan and George W. Bush.
The third quarter of 2018 saw a 3.5 percent increase in the U.S. economy, according to the Commerce Department. That was less than the second quarter, but it still indicates fairly consistent growth, particularly considering that the second quarter showed the most significant rate of growth since 2014.
The Effect of Tax Brackets
President Trump initially proposed to lower income taxes and reduce the number of tax brackets from seven to three—12 percent, 25 percent, and 33 percent. That didn't happen. The TCJA still provides for seven brackets, but they've been reduced somewhat: 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent.
The brackets in 2017, before the TCJA, were: 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent, and 39.6 percent.
The Standard Deductions
President Trump also wanted larger standard deductions, and he got them, although they weren't quite as much as he was looking for. Ultimately, Congress agreed to and President Trump signed off on the following deductions: $24,000 for married filers, up from $12,700 in 2017, $12,000 for single filers, up from $6,350 in 2017, and $18,000 for head of household filers, up from $9,350 in 2017.
Standard deductions are indexed for inflation so they increased to $24,400, $12,200, and $18,350 respectively in 2019.
But the TCJA also eliminated the $4,050 personal deduction that filers could take for themselves, their spouses, and each of their dependent. Personal exemptions are unavailable from 2018 through 2025, when the TCJA expires unless Congress acts to renew it.
Individual Taxes Overall
The average family in America should see their effective overall tax rate reduced by about 2 percent in 2018 based on these changes, according to the Tax Policy Center. The Tax Policy Center has also forecast that U.S. taxpayers will owe about $1,600 less each when they file their 2018 returns in 2019. But the majority of these filers fall into high income echelons of over $300,000 annually.
Taxes paid by corporations decreased by a pretty significant 28 percent in 2018. Revenues from this source dropped by about 61 billion from 2017.
The Tax Policy Center is of the opinion that in the short term, at least, the TCJA will stimulate the economy. But it might not have much effect in the long term.
The Effect on the Federal Deficit
Deutsche Bank initially concluded that if Trump’s proposed cuts were enacted, the federal deficit would rise from the current estimated 3.2 percent of GDP to 3.5 percent in the initial years of the Trump administration. That would represent a $100 billion revenue reduction to the U.S. Treasury. That’s not insignificant, but it won’t put Uncle Sam on food stamps, either.
Both the Congressional Budget Office and the Office of Management and Budget expect that the deficit will hit $1 trillion sometime in late 2019 or early 2020.
The Bottom Line
Trump’s tax policies and the TCJA could still have a notable impact on the economy, perhaps spurring significant growth. The Deutsche Bank study didn't consider possible economic multipliers created by Trump’s plan, such as new spending prompted by lower marginal rates, and the extent to which businesses might expand more aggressively in a lower-regulation climate. Bloomberg News noted that Trump’s plan to allow manufacturing companies to immediately expense their capital investments could lead to a large increase in corporate spending.