What is Giving Compass?
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Giving Compass' Take:
• The 2017 Tax Reform will certainly have significant macroeconomic effects, but it is difficult to say exactly what they will be. While the bill did make progress toward simplifying the tax code, there is significant potential for negative consequences.
• What elements of the bill could have been constructed differently to maintain simplicity and better help those with the greatest need? What markers will you use to judge the effects of the tax bill?
• Find out what the 2017 tax bill will mean for individuals.
In December 2017, Congress enacted the most sweeping set of tax changes in a generation, lowering statutory tax rates for individuals and businesses and altering the tax base— in some cases to remove distortionary tax preferences and in some cases to create new ones. The law generated substantial debate on many issues, notably about its long-term impact on the capital-labor ratio, GDP per worker, real wages and, in the transition to the new steady state, economic growth.
Jason Furman’s View
I believe the results of this model generally support my skepticism about the desirability of the 2017 tax law (beyond the critical issues of distribution, effects on the health system, and other issues that are important to me but beyond the scope of this paper). I believe it is most relevant to analyze the law that Congress actually passed because it reflects their priorities and tradeoffs. Moreover, most of the claims advocating for the law were based on the law that was actually passed and I would note that the Administration’s FY 2019 Budget does not propose to extend expensing. While it is possible that expensing is made permanent or the amortization of R&D is cancelled, those are separate policy questions that should and will be addressed going forward.
Robert Barro’s View
The 2017 tax reform is an important step in improving the efficiency of the U.S. tax system. On the corporate side, the main changes are the full expensing of equipment and the cut in the corporate-profits tax rate. These changes imply that user costs on corporate capital fall on average by 8 percent and that capital-labor ratios rise in the long run on average by 12 percent. The expansion in equipment by 14 percent reflects mainly the full expensing, and the rise in structures by 16 percent reflects mostly the cut in the tax rate. Overall, the predicted rise in long-run output per worker in the corporate sector is by 5 percent, and the rise in corporate wages 64 should also be 5 percent. Over a 10-year interval, the added GDP growth rate should be 0.1 to 0.2 percentage point per year.
One of us (Robert) joined a group of economists (Wall Street Journal, November 26, 2017) to argue that the corporate-tax part of the tax reform would have substantially positive long-term effects in all of these dimensions. Another of us (Jason) was a consistent critic of the law. Broadly speaking, we agree that a simple neoclassical model of the economy can provide useful insights in assessing the macroeconomic consequences of the tax changes.