The Tax Bill’s GDP Gains Offset Its Added Interest Costs
Who would refuse an offer that yields about $180,000 in labor and investment income if you agree to borrow an additional $130,000? In a sense, the tax bill embodies this offer to the American public, assuming the Congressional Joint Committee on Taxation (JCT) estimates are accurate. Media coverage of the bill focuses on estimates showing that the tax bill will not pay for itself, that tax revenues induced by the tax bill’s stimulus to growth will be less than the gross tax reductions. These reports are important but they ignore the gains in economic growth that exceed the additions to federal debt. While the ratio of debt to GDP will go up, interest payments as a share of GDP will be only slightly higher because of the tax bill.
Let’s go through the numbers. The latest estimates published by the JCT show the House-Senate conference bill’s additions to the deficit over 10 years at $1.456 trillion, partly offset by increased revenues of $483 billion from added economic growth. Higher interest rates linked to the higher debt are estimated at $55 billion. Putting these numbers together yields a rise in accumulated deficits of about $1 trillion. Both the $1.46 trillion and $1 trillion numbers attract almost all the media attention. Adding accumulated interest at existing rates increases the costs by $300 billion, yielding a total increase over 10 years of about $1.3 trillion. However, maybe because the JCT only reports the percentage growth figures (at 0.7-0.8% of average GDP over the period), the implied dollar increase in GDP has been ignored.
Calculating the bill’s induced economic growth is simple, again assuming the JCT growth estimates are accurate. According to the Congressional Budget Office (CBO), the baseline GDP levels (without the tax changes) cumulated from 2017 to 2027 amount to $236.856 trillion. The impacts arise because of the increased investments and labor supplies induced by various provisions in the tax bill. Several provisions that increase incentives for firms to remain in the U.S. are likely to have a positive impact as well. Using the JCT-projected average growth impacts of the House and Senate bills (0.75% of average baseline GDP) and applying them to baseline GDP levels yields $1.78 trillion in added GDP over the 10-year window. Thus, by incurring $1.3 trillion in added debt, the U.S. would gain nearly $1.78 trillion in added output.
But what about the added debt? Will it not be an added burden on future generations (though borne largely by high-income taxpayers)? The appropriate way of examining the added burden is the interest payments as a share of GDP, since both are annual flows. Without the tax bill, CBO estimates that interest payments will virtually double as a share of GDP between 2018 and 2027 from about 1.54 to 2.92 percent. The tax bill will raise this share slightly to 3.0. Thus, the rise in interest payments linked to the tax bill will be a very small share of the overall increase.
Finally, assuming the added growth is distributed like current GDP, the tax-induced growth will move the distributional impacts in a positive direction as well, since the added taxes induced by the added GDP will be far more progressive than the added income gains.
Not everything in the new law is pro-growth, pro-simplification, and pro-equity. But the economic growth forecast by the JCT significantly exceeds the projected loss in revenues at a cost of a modest rise in the share of GDP devoted to interest payments.
Robert Lerman is an institute fellow at the Urban Institute and emeritus professor of economics at American University.
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