Daniel Bunn President and CEO at Tax Foundation | Twitter Website
The potential permanent extension of the Tax Cuts and Jobs Act (TCJA) provisions, set to expire in 2026, could have significant economic, revenue, and distributional impacts according to an analysis by the Tax Foundation. The analysis indicates that making these tax cuts permanent would increase long-run economic output by 1.1 percent, national income by 0.4 percent, capital stock by 0.7 percent, wages by 0.5 percent, and hours worked equivalent to 847,000 full-time jobs.
However, this permanence would also lead to a substantial reduction in federal tax revenue over the period from 2025 through 2034. Specifically, extending individual provisions would result in a $3.6 trillion decrease ($3.2 trillion dynamically), estate tax provisions would see a $240 billion reduction ($240 billion dynamically), and business provisions would lose $648 billion ($351 billion dynamically). In totality, these changes amount to a $4.5 trillion decline in tax revenues which is partially offset by economic growth accounting for $710 billion or about 16 percent of the loss.
The analysis highlights that "added interest costs plus the revenue losses from TCJA extension result in a combined deficit increase of $5.4 trillion ($4.6 trillion dynamically) from 2025 through 2034." This fiscal impact raises concerns as it could drive up long-term debt-to-GDP ratios from an estimated baseline of 184 percent in 2060 to between 205-212 percent depending on whether dynamic scoring is considered.
The report also notes potential distributional effects where after-tax incomes could rise on average by "2.9 percent (3.4 percent dynamically) in 2026," with varying benefits across income groups; top earners may see larger percentage increases compared to lower-income groups.
Moreover, should the individual provisions become permanent under this plan, it is expected that only nine percent of filers might experience increased taxes while about sixty-two percent would see reductions.
These projections underscore both the economic stimulus potential of making TCJA cuts permanent as well as fiscal challenges posed due to increased deficits and debts associated with reduced government revenues.
