The Tax Cuts and Jobs Act (TCJA) of 2017 is often compared to the Economic Recovery Tax Act with respect to major reductions in individual and corporate income tax rates plus accelerated depreciation.
The 1981 tax cuts averaged -2.9% of GDP during the next four years. President Reagan and the Republican Senate became concerned with large future deficits just the following year. During the remainder of President Reagan’s term, five tax bills increased revenues by 1.85% of GDP, offsetting 64% of the 1981 tax cuts.
Two more tax increases along with spending reductions addressed projected deficits in 1990 and 1993. Since 1993, there have been tax increases in the US, except the Affordable Health Care Act of 2010, and then only 0.2% of GDP.
The 1980s’ tax increases preserved the lower individual and corporate tax rates, and in particular inflation indexing of the individual income tax brackets. The tax bills reduced tax expenditures as well improved tax administration enforcement and information reporting, and included scheduled payroll tax increases as part of protecting the solvency of Social Security.
In a balanced approach to reducing the potentially trillion dollar annual deficits, Congress has many tax options remaining. The TCJA embraced anti-base erosion and profit shifting (BEPS) protections as part of the international changes, and scaled back itemized deductions. However, the TCJA did not limit the many types of exempt and deferred investment income. The TCJA gave a pass to the oil and gas and real estate industries. It provided a new deduction for pass-through business owners without any changes in enforcement tools to reduce the current high rates of non-compliance. A limitation on multinational enterprises’ ability to overleverage their US affiliates was dropped in the final legislation. The tax benefits of LIFO and carried interest remain.
Although the 2017 tax cuts average only 1.06% of projected GDP (yes, less than 40% of the Gipper's tax cuts, and the percentage will be lower to the extent the 2017 tax cuts stimulate GDP in the initial years), concerns about the rising budget deficits at a time of low unemployment and an aging population are warranted. Tax increases as part of meaningful deficit reduction are possible while still retaining the key features of the 2017 reforms.
Tom Neubig