3 minute read 19 Jun 2019
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How US economy gets a lift from new tax law

EY Global
By EY Global

Ernst & Young Global Ltd.

3 minute read 19 Jun 2019
Related topics Tax Growth US tax reform Tax controversy
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In the long term, though, the higher federal deficit could weigh on growth.

The US Tax Cuts and Jobs Act (TCJA) is expected to usher in a period of increased growth for the world’s largest economy. According to a forecast from our Quantitative Economics and Statistics (QUEST) group, the TCJA could boost the US economy’s size by an average US$235 billion between 2018-2022, and by an average of US$155 billion between 2023–2027. (The QUEST calculations are based on the US$19.4 trillion US economy in 2017.)

In coming years, US economic growth will come from several sources. Capital stock (e.g., equipment and factories) should increase due to higher levels of capital spending, while the labor market will improve as the supply of labor and after-tax wages rise, according to QUEST.

Over the long term, the benefits from TCJA could be more modest. QUEST forecasts a 0.2% boost to real gross domestic product (GDP) beyond 2027. This is because some of the TCJA’s growth catalysts, such as the complete expensing of certain capital expenditures and reductions for personal income tax rates, will be phased out by that time. Another potential damper on growth: rising US interest rates as a result of the expanding US federal deficit.

A lift from new tax law - graph

The cost

While the TCJA may bolster economic growth, it also comes at a cost: lower tax revenue for the US government and higher federal budget deficits. The TCJA will increase the total projected US federal budget by US$1.9 trillion between 2018 and 2028, according to an April 2018 report from the US Congress’ Congressional Budget Office.

The course toward a higher fiscal budget deficit can’t continue indefinitely. In its April 2018 World Economic Outlook report, the International Monetary Fund (IMF) called debt dynamics in the US over the next five years “unsustainable,” and said measures must be taken to raise tax revenue and curb public spending dynamics in the future.

There are different ways this could be achieved, including raising corporate or personal income tax rates, cutting spending or even introducing a federal value-added sales tax (VAT).

A lift from new tax law

Percentage point change in overall budget balance of selected G20 economies' GDP between 2017 and 2021.

Long-term view

When planning for the future of their US operations in light of the TCJA, businesses should consider both the clear short-term benefits along with the longer-term uncertainty awaiting the US economy.

In the short term, the TCJA offers many incentives for businesses to invest in the US and grow the economy: the reduction in the corporate income tax rate from 35% to 21%; the repatriation of overseas funds; and the full expensing of certain capital expenditures.

On the other hand, the TCJA can’t alleviate all of the long-term risks to the US economy. Changes to inflation, interest rates, global trade policies and government debt levels could all impact the US economy’s performance going forward.

Sources: “The Budget and Economic Outlook: 2018 to 2028”, Congress of the United States Congressional Budget Office, April 2018; “The Senate’s Tax Cut Would Generate Little New Long-Run Economic Growth”, Benjamin R. Page, Tax Policy Center, 11 December 2017; “Analyzing the acroeconomic impacts of the Tax Cuts and Jobs Act on the US economy and key industries”, EY, 2018; “World Economic Outlook”, April 2018, International Monetary Fund.

This article was originally published in Tax Insights on 23 August 2018.

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Summary

In coming years, US economic growth will come from several sources, according to EY’s Quantitative Economics and Statistics (QUEST) group: Capital stock (e.g., equipment and factories) should increase due to higher levels of capital spending, while the labor market will improve as the supply of labor and after-tax wages rise.

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EY Global
By EY Global

Ernst & Young Global Ltd.

Related topics Tax Growth US tax reform Tax controversy
Upvote