TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Thursday, March 8, 2018

Harvard Economists: New Tax Law Will Cost Treasury $1.2 Trillion Over A Decade

Wall Street Journal, Tax Law Doesn’t Pay for Itself, Harvard Economists Find:

The recent changes to the U.S. tax law will increase economic growth modestly but not fast enough to pay for themselves, according to a new estimate from a pair of economists from different sides of the political spectrum. In other words, the additional government tax revenue generated by higher growth won’t be enough to offset the drop in revenue due to tax cuts.

The net cost to the Treasury, after accounting for economic growth, would be $1.2 trillion over a decade, according to the paper by the Harvard University economists, conservative Robert Barro and Jason Furman, who was an adviser to President Barack Obama.

Robert J. Barro (Harvard) & Jason Furman (Harvard), The Macroeconomic Effects of the 2017 Tax Reform:

This paper uses a cost of capital framework to analyze the long-run steady state and transition path for GDP as a result of the 2017 tax law. For the law as written, the long-run increase in corporate productivity would be 2.5 percent, which translates into a 0.4 percent increase in GDP after ten years—or an increase in the growth rate of 0.04 percentage point per year. If the 2019 provisions of the law are made permanent, these numbers would be 4.7 percent for long-run corporate productivity, 1.2 percent for GDP after ten years, and 0.13 percentage point increase in the growth rate. The paper does sensitivity analysis, including finding that if interest rates rose as a result of fiscal crowd out the tenth year GDP increases would be 0.2 percent and 1.0 percent for the two scenarios respectively. The paper assesses the short-run impact of the 2.3 percentage point reduction in average marginal tax rates under the law, which would be associated with a 0.9 percentage point increase in the annual growth rate for 2018-19—although the magnitude of the impact could differ from the historical pattern based on the specific tax changes and the economic situation.

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