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In its April fiscal update, the Congressional Budget Office estimated that the Tax Cuts and Jobs Act (TCJA) would increase the federal debt by $1.889 trillion from 2018-2027, about $433 billion more than the Joint Committee on Taxation projected last December. The CBO generally defers to the JCT in estimating the cost of tax bills, so that revision likely reflects a reevaluation by JCT as well. What accounts for the big change?
Some of the revision is due to CBO’s new, more optimistic, projection of economic growth over the period. But that more positive forecast is only part of the story: Most of the additional revenue loss is simply because CBO now thinks TCJA’s business tax changes will result in bigger tax cuts than earlier forecast.
Let’s take the economic changes first. Because of the tax bill itself and other legislative actions; new, more positive data about the current state of the economy; and updated forecasting methods, CBO is now projecting that future corporate and individual incomes will be higher than in the forecast underlying JCT’s December estimate. As a result, the reductions in corporate and individual income tax rates in the bill imply a greater loss of revenue.
However, the more optimistic economic forecast accounts for less than half of the increased revenue cost of the TCJA. CBO now estimates the economy will grow by about 48 percent in total between 2018 and 2027, compared to its 2017 forecast of about 41 percent. Those revisions boost its estimates of corporate income tax receipts by 12 percent, and individual income taxes by 2 percent, on average, over the next decade, compared to the agency’s 2017 economic projections. That suggests the December estimate of $1.348 trillion in corporate rates cuts will rise by about $162 billion and the $1.214 trillion projection of individual rate cuts will increase by about $24 billion. But those changes account for only $186 billion of the $433 billion total decline in revenue, relative to the December estimate.
So most of the increased cost came from new views about how the tax law would affect revenues, rather than updated economics. As CBO says, the updated estimate “reflect[s] a number of technical revisions. Those revisions include information about the implementation of the tax act learned in recent months.”
What exactly did CBO learn? Its report includes several explanations: The revisions include “modifications of the deductions from income for the costs of capital investments, interest costs, and net operating losses.” That suggests CBO now thinks businesses would gain more from the TCJA’s tax cuts such as the expensing of purchases of new equipment, and would lose less from tax increases such as limits on the deductibility of interest expenses, than JCT originally projected. That could be in part because, for example, businesses are now projected to spend more on equipment—and therefore claim larger deductions—than they were in the December analysis.
Whatever the reason, the government’s experts now think the tax law will be a lot more expensive than they estimated when Congress first passed it.
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