Exploring Tax Cuts, Jobs, And Tax Revenue

Exploring Tax Cuts, Jobs, and Tax Revenue There has been discussion ab

There has been discussion about whether the Tax Cuts and Jobs Act that took effect in 2018 will increase tax revenue. Tax revenue can be thought of as an average tax rate multiplied by taxable income. If the average tax rate falls while taxable income stays the same, tax revenue will fall. But what if the tax cuts increase taxable income? Both of the major schools of thought in macroeconomics (Keynesians and Neoclassicals) believe that tax cuts increase economic growth.

Economic growth increases taxable income. Our recent economic growth has brought unemployment down to historically low levels. Think about this. Reply to these questions to begin your discussion: Do you think that the tax cuts of the Tax Cuts and Jobs Act will increase economic growth and taxable income so much that tax revenue will increase? Or do you think that the tax cuts will reduce tax revenue? Explain your answers.

Paper For Above instruction

The debate over the impact of the 2018 Tax Cuts and Jobs Act (TCJA) on federal tax revenue centers on two primary considerations: changes in taxable income and alterations in the average tax rate. Proponents argue that substantial economic growth stimulated by tax cuts can compensate for the reduction in tax rates, ultimately increasing overall tax revenue. Conversely, critics maintain that the reduction in tax rates will lead to decreased revenue despite growth in taxable income, emphasizing that tax cuts primarily benefit high-income earners and corporations, potentially widening income inequality without significantly boosting revenue.

The core economic principle suggests that tax revenue is a product of the tax base (taxable income) and the average tax rate. When the government cuts tax rates, the immediate effect is a decrease in the tax rate component, which can lead to a decline in revenue unless countered by a sufficiently large increase in the tax base—taxable income. The argument supporting the likelihood of increased revenue hinges on the Keynesian and Neoclassical perspectives, both of which posit that lower taxes stimulate economic activity, thereby increasing employment, production, and ultimately, taxable income.

Supporters of the tax cuts, including many economists aligned with supply-side economics, argue that reductions in individual and corporate tax rates provide incentives for work, investment, and entrepreneurship. These incentives are believed to lead to higher overall economic growth, which then expands the taxable income base. For example, studies analyzing the effects of tax cuts in the past, such as those during the Reagan administration, indicated that while there was a decline in the marginal tax rates, a boost in economic activity partially offset the loss in revenue, sometimes even leading to increased revenue over time (Gale & Lierman, 2017).

Furthermore, empirical evidence suggests that the TCJA contributed to economic growth by lowering tax burdens and increasing disposable incomes. Between 2018 and 2019, the U.S. economy experienced a period of modest growth, with unemployment reaching historic lows (Bureau of Labor Statistics, 2020). This supports the notion that a lower tax environment encourages hiring and investment, thus expanding taxable income. As taxable income increases, even at a reduced tax rate, total revenue could stabilize or possibly rise, though this is subject to the magnitude of growth and the elasticity of taxable income relative to tax rate changes (Saez, 2019).

However, critics contend that the TCJA's tax cuts primarily favor higher-income individuals and corporations, who tend to have less elastic responses to tax cuts, meaning their taxable income may not increase proportionally. This could result in a reduction in overall tax revenue. Studies have shown that the income distribution effects of the TCJA favored wealthier households, and the anticipated economic growth was modest at best, raising questions about the sustainability of revenue gains (Joint Committee on Taxation, 2019).

In addition, the revenue loss from tax cuts and the increase in the federal budget deficit raise concerns about long-term fiscal sustainability. Financing the deficit could lead to higher borrowing costs and potentially crowd out private investment, offsetting some of the growth benefits (Blinder & Zandi, 2020). Therefore, the actual impact of tax cuts on revenue depends heavily on how significantly they stimulate economic growth and taxable income versus the reduction in the tax rate itself.

Considering the evidence and economic theories, a plausible conclusion is that while tax cuts like those enacted in 2018 can stimulate economic growth and increase taxable income, the extent of this effect is uncertain and likely insufficient to fully offset the revenue lost from lower tax rates. As a consequence, it is probable that the TCJA will lead to a reduction in total tax revenue in the short to medium term, unless the growth effects are more substantial than anticipated. Furthermore, fiscal policy should weigh these trade-offs carefully, balancing economic stimulation with fiscal sustainability.

References

• Bureau of Labor Statistics. (2020). The Employment Situation — January 2020. U.S. Department of Labor. https://www.bls.gov/news.release/empsit.nr0.htm
• Blinder, A., & Zandi, M. (2020). The Fiscal Impact of the Tax Cuts and Jobs Act. Center on Budget and Policy Priorities. https://www.cbpp.org/research/federal-budget/the-fiscal-impact-of-the-tax-cuts-and-jobs-act
• Gale, W. G., & Lierman, F. (2017). The Effects of Tax Cuts on Economic Growth. Tax Policy Center. https://www.taxpolicycenter.org
• Joint Committee on Taxation. (2019). JCX-58-19. Technical explanation of the Revenue Provisions of the Tax Cuts and Jobs Act. U.S. Congress.
• Saez, E. (2019). The Impact of the Tax Cuts and Jobs Act on the Income Distribution. National Bureau of Economic Research. https://www.nber.org/papers/w25917