TCJA Extension Might Not Pay for Any of Itself

US Capitol Building in Washington –

 

New york – Rashad  Alkhader – From News
Committee for a Responsible Federal Budget –

Despite claims that tax cuts pay for themselves, analyses from across the political spectrum have found that the economic effects of extending the expiring parts of the Tax Cuts and Jobs Act (TCJA) would offset 1 to 14 percent of the revenue loss – falling well short of the 100 percent needed to pay for itself. New data from the Congressional Budget Office (CBO) finds that economic feedback may not cover any of the revenue loss and that TCJA extension might even add more to the debt on a dynamic basis, particularly over the long run, than under conventional scoring.

In a slide deck and accompanying data, CBO outlines the fiscal and economic effects of extending the individual income tax provisions of the Tax Cuts and Jobs Act (TCJA), which they estimate would add $3.7 trillion to the debt (with interest) through Fiscal Year (FY) 2034. CBO finds that “the dynamic budgetary effects of [TCJA] expiration … would be very similar to the conventional estimate,” as the positive effects of lower taxes would be counteracted by the negative effects of higher debt.

Importantly, CBO’s analysis only looks at extending the expiring individual provisions, and not certain business and estate tax provisions which might do relatively more to boost economic growth (but not nearly enough for extension to be self-financing).

CBO estimates that extending the expiring individual TCJA provisions would increase output by an average of 0.1 percent from FY 2025 through 2034 while boosting interest rates on ten-year Treasuries by an average of 0.06 percent. Assuming the additional output is taxed at an average rate of 25 percent, it would produce about $90 billion of positive revenue feedback. However, assuming all bond yields rose in concert with ten-year Treasuries, those higher interest rates would add $150 billion to the debt, more than counteracting the revenue gains.

While CBO finds that lower tax rates would improve economic growth over the short term by supporting stronger near-term demand and increasing the incentive to work, the higher debt resulting from the unpaid-for tax cut extension would ultimately counteract this effect by crowding out and thus reducing investment.

After peaking at about 0.3 percent in FY 2027 and 2028, CBO estimates the boost to economic growth from extending TCJA’s individual tax provisions without offsets would begin to decline by about 0.06 percent per year and would eventually turn negative. By FY 2034, Gross Domestic Product (GDP) would be 0.08 percent lower than under the current law baseline.