On Monday, Nov. 18, Deputy Assistant Secretary for Tax Analysis at the U.S. Treasury Greg Leiserson ’06 delivered a talk on the 2017 Tax Cuts and Jobs Act (TCJA), parts of which are set to expire in 2025. The talk was part of the Clair Wilcox lecture series coordinated by the economics department. Leiserson explained the complexities of the debate surrounding the extension of expiring portions of the TCJA and related economic implications. He concluded the lecture with a Q&A for students and faculty.
At the start of the lecture, Leiserson explored the context surrounding the passage of the TCJA, which provides long-term tax cuts for corporations and short-term tax cuts for individuals. “Corporate tax cuts were largely permanent. Individual tax cuts were largely set to expire. This is a function of congressional budget rules, whereby the bill could not increase the deficit after ten years,” Leiserson said.
Along with corporate tax cuts, the TCJA enabled corporations to move money into the United States without the burden of high taxes. “[Before] 2017, the goal of [corporate] tax planning, by and large, was to get as much [possible] profit abroad. Then you keep the money abroad so you could find a low tax way to get it back … to the U.S. later, when you could do that at a reduced rate,” Leiserson said. “After 2017, the game changed. The TCJA lowered the corporate tax rate to 21% and said [that corporations] could repatriate foreign profits tax free.”
The TCJA also includes tax cuts for individuals, which are set to expire in 2025. Leiserson compared the effects of the TCJA on various income groups, providing statistical visualizations to demonstrate that higher-income groups experienced more significant tax cuts as a result of the TCJA. “We see a general upward trend as you move up the income distribution. Folks in the lowest income quintile get about a 0.5% increase in their after tax income. The top quintile is a shade under 2.5% of income. And then if you’re in the top 1% you’re looking at something more like 3.5% of income,” Leiserson said.
Additionally, the TCJA cut taxes for certain types of corporations, called pass-through corporations. Unlike C corporations, which are taxed separately from their owners, pass-through corporations are not directly taxed. Instead, their owners pay taxes on their individual incomes, including income directly from the corporation.
The TCJA lowered the corporate tax rate that applies to C corporations, and not the higher individual tax rate that applies to pass-through corporations. Leiserson explained that creating a tax cut that applied to pass-through corporations is a political concern. “The corporate tax rate is 21% [while] the top individual rate, which is applicable to pass-through [corporations], is 37%. The legislation cut the corporate tax rate by fourteen percentage points. So the claim [was] that that was unfair for pass-through businesses,” Leiserson said.
Leiserson also provided a visual comparison of the taxes that pass-through corporations pay versus the taxes they would pay if taxed as C corporations. Overall, due to the differences in taxation rules between the two types of corporations, he showed that pass-through corporations already paid less in taxes than they would as C corporations. “Across basically all of the distribution, the [pass-through] tax rate is no higher than the C corporation, and in many parts of the distribution, it’s lower,” Leiserson continued, “And so that sort of unfairness … wasn’t there.”
While the TCJA cut taxes, it also lowered the ceiling for a tax deduction of state and local taxes from federal taxes, predominantly impacting higher-income individuals paying state and local taxes. “You can think of this as having two key effects. One is a complete increase in marginal tax rates for people who are paying significant state and local income taxes,” Leiserson explained. “And the second is a substantial increase in taxes that applies almost exclusively to those with high incomes, because you need to have more than 2,000 dollars [taxed] … for this to apply.”
Later in the lecture, Leiserson also outlined methods of economic analysis that are often useful to understand the impacts of economic policies, such as extending the TCJA’s individual tax cuts, over time.
Analyses called “revenue estimates” can explain how policies such as the TCJA affect the deficit over time if continued. “Revenue estimates … report impacts on the deficit. A revenue estimate … is a score of extending most of the provisions of the TCJA … and the impact of each of these provisions on the deficit over the course of the decade,” Leiserson said.
Other types of quantitative analysis can also explain how extending the TCJA might benefit or harm various groups. Leiserson highlighted how this type of analysis is the primary method of explaining costs and benefits of any policy on segments of the population. “We have a distribution table answering the question [of] who benefits,” he continued. “And if you see someone on TV saying that [some] legislation is a giveaway [to a group] … they probably have something like this in their back pocket.”
Extending the individual components of the TCJA lowers taxes, most significantly for higher-income households. However, it also has the cost of increasing the deficit by 4 trillion dollars over a decade. Leiserson emphasized the varied costs and benefits of a policy extending the TCJA. “Relative to the status quo in which the tax cuts expire, if you extend them, these are the gains for folks, the percent of actual tax income across the distribution,” he said. “66% of the tax cut [reaches] the top quintile [of income], and roughly a quarter [reaches] the top 1%. So you could ask the question, is it worth 4 trillion [dollars of deficit] to deliver that pattern [of tax cuts]?”
