The Math for TCJA Extension Doesn't Add Up
Republicans Are Making Very Rosy Growth Assumptions About the Tax Cuts
The potential extension of the Tax Cuts and Jobs Act is getting much of the attention coming out of Washington, DC. Well, the potential extension and the drama going on with it. As of now, House Republican leadership doesn’t have the votes to pass it through the chamber after the bill went down in a markup in the House Budget Committee on Friday. That wasn’t a surprise. It was telegraphed hours in advance that the votes weren’t there.
The remaining issues are significant. Republicans from high-tax blue states want to increase the cap for the state and local tax (SALT) deduction while conservatives want to reduce Medicaid spending further.1 If conservatives get their wish, it could cost House Republican leadership votes from vulnerable members. There are other issues, but those issues are less significant.
Conservatives’ push for spending cuts is laudable. More than 30 Republicans signed a letter to Speaker Mike Johnson (R-LA) calling for a “genuinely fiscally responsible” reconciliation bill.
What they mean by that is that if the House Ways and Means Committee produces reconciliation recommendations that increase the deficit by $4.5 trillion,2 these more than 30 members want deficit reduction from other committees totaling $2 trillion. On the low end, if Ways and Means’ recommendations increase deficits by $3.5 trillion, they want $1 trillion in deficit reduction.
Do the math. Obviously, the numbers don’t add up. The bill would still add massive amounts to the budget deficit over ten years under these scenarios. We can’t look at changes to law on a static basis. We have to look at the dynamic effects of tax changes. I tend to agree with the general notion that tax cuts can generate economic activity that increases revenue. That said, not every tax cut is equal. Some tax changes generate more economic growth than others.
Let’s look at projections for tax revenue from June 2016, the last projections issued by the Congressional Budget Office (CBO) before the passage of the Tax Cuts and Jobs Act (TCJA), compared to the actual tax revenue received by the federal government. We’re using gross domestic product as the measure because it provides a steadier gauge. The years in purple in the chart are projections for FY 2025, FY 2026, and FY 2027 from the January 2025 budget data.3
The data are clear that TCJA didn’t pay for itself. On the higher end, TCJA paid for 26 percent of itself. Obviously, the corporate tax cut generated growth, as did the international tax reforms (also a business provision), but the full expensing of capital investment (bonus depreciation) was a growth driver.4 The individual tax cuts weren’t as much of a growth driver.
I say all this to explain that I’m perplexed by a tweet from Rep. Chip Roy (R-TX),5 who indicated that Republicans assume a 2.6 percent economic growth rate–$2.6 trillion in economic activity over ten years. Admittedly, I hadn’t looked into this until I saw the tweet. That assumption is incredibly optimistic. The Committee for a Responsible Federal Budget is less diplomatic, calling it “fantasy math.” No one credible is making such an assumption. The CBO projects growth of 1.8 percent from FY 2026 through FY 2035 (except in FY 2027 when 1.7 percent growth is projected). The center-right Tax Foundation, for example, projects only a 1.1 percent increase in long-run GDP from the extension of TCJA. That means the extension of TCJA would pay for 16 percent of itself.
What does this mean in a broader context? We’re talking about the macroeconomic effects of tax changes–in this case, extending tax cuts–but what about other policies, like, say, tariffs?
Recently, the Wharton School at the University of Pennsylvania ran the numbers on Trump’s trade war in its budget model and “projects Trump’s tariffs (April 8, 2025) will reduce long-run GDP by about 6% and wages by 5%.” Since, we’ve discussed TCJA, which lowered the corporate income tax rate from 35 percent to 21 percent, Penn-Wharton explains, “These losses are twice as large as a revenue-equivalent corporate tax increase from 21% to 36%, an otherwise highly distorting tax.”
Now, this analysis was released more than a month ago, and Trump has notably backed down on the extreme tariffs with China.6 Still, the analysis confirms what anyone with a basic understanding of economics knows–tariffs hurt the economy. The Tax Foundation and Penn-Wharton have different models. Penn-Wharton assumes only a 0.2 percent increase in GDP from extending TCJA. The Tax Foundation projects a 0.7 percent reduction in GDP from the tariffs.7
Republicans need to be honest about the assumptions they’re making about the impact of the reconciliation bill. It’s going to increase the deficit. That deficit is already unsustainable. The better option would be to address the fiscal problems America faces by modernizing social programs that are primarily driving spending while overhauling the tax code at the same time.8 This means working with Democrats rather than pushing a partisan bill through Congress.
“Compromise” is an evil word in hyper-partisan times, but it shouldn’t be. Addressing the sources of the growth deficits and debt we face in a bipartisan manner should be the priority, not partisan legislation.
I hope to get around to writing something about SALT soon. If you’ve known me long enough and followed my writing, you know how much I hate SALT.
The maximum allowable deficit that Ways and Means can run under H.Con.Res 14 is $4.5 trillion.
TCJA expires after the first quarter of FY 2026.
TCJA phases out full expensing. Businesses would fully deduct capital investments from 2018 through 2022, but the deduction decreased in 2023 and will be fully phased out after 2026. After 2026, businesses can deduct capital investment over several years, rather than immediately.
I don’t know that Congressman Roy is defending the assumed growth rate, so I don’t mean to come across as critical.
And possibly only temporarily!
Yes, I know there’s a difference between GDP and long-run GDP. I’m merely highlighting the models come to different conclusions.
Social Security, net interest, and Medicare are the three largest programs/categories of federal spending. Medicaid is the fifth largest. The top five programs/categories of federal spending represent 71 percent of federal spending in FY 2025 and are projected to be 78 percent of federal spending in FY 2035.