Last year’s tax legislation fell short of some supporters’ key stated goals, notably to greatly simplify the tax code and strengthen the federal government’s financial position.
Two new analyses from the International Monetary Fund (IMF) and the Peter G. Peterson Foundation bring these shortcomings into sharp focus. Both should be of interest to elected officials, political candidates and voters.
In an IMF working paper on the legislation, the three authors -- Nigel Chalk, Michael Keen and Victoria Perry -- say the Tax Cuts and Jobs Act (TCJA) has “many positive aspects,” including steps to broaden the base of the personal income tax and reduce marginal rates.
But the paper expresses concern that independent estimates show a “significant fiscal cost” of the legislation.
The paper points to projections by the Congressional Budget Office (CBO), for example, that show the tax law adding $1.9 trillion to the federal deficit over 10 years even when positive economic feedback estimates are included.
This large fiscal cost, the paper says, “leaves open the possibility that substantial additional tax or spending measures may be needed to restore the fiscal position. At that point, it may be that other tax measures that were not considered in the TCJA -- the adoption of a federal VAT, carbon taxation (or an increase in the gasoline tax) -- may re-enter the debate.”
The IMF paper notes that some of the tax law’s changes are quite complicated and their implementation “requires a significant number of regulations that are not yet available, creating uncertainty in the final application of the law.”
The law’s structural changes to international taxation, the paper says, “are novel, and analysts are still grappling to fully understand their implications. They are by no means a simplification of what is already a complex system.”
The paper also says the tax law “could have been more effectively structured to achieve the stated goal of supporting the middle class.”
In fact, the law made corporate tax cuts permanent but individual tax cuts temporary. This summer the president and many Republicans lawmakers have been discussing the possibility of adding even more to the federal debt to, among other things, make the temporary tax cuts permanent.
Appraising the law is challenging, the paper says, because it is “multi-faceted, complex, and leaves considerable uncertainty as to how the system will look in just a few years.”
The recent Peterson Foundation analysis focuses on “tax expenditures,” which are various provisions in the tax code that favor some taxpayers, businesses and industries over others.
These provisions function largely as government spending in disguise, and last year totaled $1.5 trillion -- more, the foundation notes, than the Defense budget and Medicare combined.
Tax expenditures are also responsible for most of the complexity in the tax code. Yet they often fail to receive the scrutiny they deserve.
“Many economists, policymakers, and analysts believe it would help the economy to do away with some or all of those tax breaks to make the code more simple, efficient, and fair,” the foundation says.
“Last year’s tax legislation was a key opportunity to do just that, but in addition to adding significantly to our national debt, the Tax Cuts and Jobs Act actually increased the number of tax breaks. According to the Joint Committee on Taxation (JCT), prior to enactment of the Tax Cuts and Jobs Act, there were 216 tax expenditures; now 223 exist.”
The law changed or eliminated some tax expenditures but expanded others and created new ones. Consequently, the legislation failed to reduce the overall cost of tax expenditures.
This means continued complexity as well as a blown opportunity to help reduce federal deficits in the coming years.
With the tax code still an inefficient tangle of tax expenditures and the administration projecting trillion-dollar deficits for the next three years, elected officials in Washington clearly need to take another look at tax policy.
This time, however, they should avoid deficit-financed tax cuts and try to reduce tax expenditures rather than increase them.
The Peterson Foundation provides financial support for The Concord Coalition.