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Economics of the Tax Cuts and Jobs Act, June 1
Not all tax cuts have the same effect on the U.S. economy. Most analyses of the Tax Cuts and Jobs Act (TCJA)
have predicted that the bill will grow the U.S. economy over the next 10 years. But why is this the case?
When analyzing how a tax change will affect the U.S. economy, the most important question to ask is, "What
incentives does it create?" Regarding the Tax Cuts and Jobs Act, certain key parts of the law will increase the
incentives of businesses to invest in the United States, which will grow the long-term size of the U.S. economy.
Other parts of the law, particularly the provisions that are temporary, will have limited economic effects.
1. Tax policy can affect the size of the economy by changing incentives to work and invest.
In the long run, the size of the economy is determined by labor, capital, and technology. As a result, the
economic impact of a tax cut isn't primarily based on how much money it puts in people's pockets; it
depends on what incentives it creates for work, investment, and innovation.
2. The main reason why the Tax Cuts and Jobs Act is expected to grow the economy is the corporate rate
Corporate rate cuts have a large economic effect because they make it less expensive for companies to
invest in the United States. There's good evidence that companies' investment decisions are sensitive to
3. The temporary provisions in the TCJA will have limited economic effects if they are not made permanent.
When businesses and households make decisions, they consider long time horizons. As a result,
temporary tax provisions won't change the fundamental trade-offs that taxpayers face. However, some
of the temporary tax provisions, if made permanent, could have a very significant economic effect
notably, 100 percent bonus depreciation.
4. The positive economic effects of the TCJA will lower the fiscal cost of the law.
Dynamic scoring allows lawmakers to see how the economic effects of tax changes will affect revenue.