Tax Cuts 2.0 Would Shrink the Economy in the Long Run, JCT Analysis Says

Tax Cuts 2.0 Would Shrink the Economy in the Long Run, JCT Analysis Says


The second round of Republican tax cuts would provide a modest boost to the economy in the near term — but, by driving government debt higher, it would actually hurt long-term growth, Congress’ Joint Committee on Taxation said in a new analysis.

House Republicans plan to vote Friday to make permanent the individual tax cuts that went into effect this year and are currently set to expire in 2026. The bill is expected to pass the House but will likely be shelved by the Senate ahead of the midterm elections.

The Joint Committee on Taxation has estimated that the bill would cost $631 billion over the next decade, though its longer-run costs would run into the trillions of dollars. The updated analysis released Wednesday (the pdf is here) says that making the tax cuts permanent would generate about $93 billion in additional revenues from increased economic growth over the next decade, although higher interest rates caused by the added debt would reduce those revenues by about $7 billion, producing a net cost of about $545 billion.

The additional economic benefits produced by extending the tax cuts would cover roughly 14 percent of their static cost.

In the long run, however, beyond the 10-year window used by lawmakers to evaluate fiscal legislation, the cost of making the individual tax cuts permanent is substantially higher, due in large part to higher interest rates produced by the increase in federal debt. “The Joint Committee staff projects that in the decades after 2028, while employment will continue to be somewhat higher than projected under present law, investment and GDP will be lower than under present law, and the budgetary feedback from this effect will become negative,” the report says.

The JCT noted that long-term projections are inherently difficult and that there is “substantial uncertainty” about how the economic effects will play out, and how future lawmakers will react to unfolding events.

Bloomberg’s Laura Davison says that time could indeed play an important role for the tax cut extension, though not quite the way the JCT expects. While the bill is likely going nowhere for now, things will likely look a lot different in seven years as the expiration of the individual tax cuts approaches. “[I]f history is any guide,” Davison writes, “taxpayers who benefited from the overhaul shouldn’t think all hope is lost — they’ll just have to be patient until shortly before the provisions are set to expire at the end of 2025.”