Financial Consequences of Prolonging Lapsed Provisions within the Tax Cuts and Employment Legislation
The Tax Cuts and Jobs Act (TCJA), passed in 2017, was the largest tax cut in history. Now, discussions are underway to extend these provisions beyond 2025.
According to a study by Chodorow-Reich, Smith, Zidar, and Zwick (2024), the TCJA induced an investment boom. Another study by Hartley, Hassett, and Rauh (2025) concludes that TCJA-induced declines in the user cost of capital led to a strong positive investment response. These findings suggest that extending TCJA provisions could further stimulate investment.
EY, one of the world's largest consulting firms, predicts that extending TCJA provisions would save almost 6 million jobs, boost aggregate wages by $540 billion, and increase GDP by $1.1 trillion compared to if TCJA expires. The Council of Economic Advisers (CEA) estimates that the TCJA would result in a 2.0 to 4.0% long-run increase in real GDP and a $4,000 increase in real (inflation-adjusted) wages per worker.
The TCJA shifted the United States from a worldwide to a territorial tax system, prioritized small businesses by enacting a 20% deduction for pass-through entities and reducing their marginal tax rates, and instituted full expensing for equipment investment. The extension of TCJA will prevent a more than $4 trillion tax hike on Americans, save over 4 million full-time equivalent jobs from being destroyed, and facilitate $100 billion of investment in distressed communities through Opportunity Zone (OZ) tax incentives.
However, extending TCJA provisions through 2034 will modestly boost economic output by about 0.6% over two decades due to higher investment incentives, leading to approximately $267 billion (about 6%) of the roughly $4.5 trillion revenue loss being offset by increased taxable incomes and revenues. Yet, higher deficits and debt will raise interest costs, partially offsetting these gains.
Fully making TCJA tax cuts permanent adds an estimated $3.4 to $3.7 trillion to the federal deficit over ten years, depending on which provisions are extended. The extension includes keeping individual income tax rates at TCJA levels, doubling the standard deduction, and modifying itemized deductions, which together form the bulk of the fiscal cost. Households across income groups see tax savings, but higher-income groups receive disproportionately larger benefits.
While the extension modestly stimulates the economy in the near term, it worsens long-term budget deficits and fiscal imbalances given the large revenue losses and debt service costs from higher federal borrowing. Therefore, the decision to extend TCJA provisions beyond 2025 requires careful consideration of its potential economic benefits against the significant costs and increased federal deficits over the long term.
[1] Committee for a Responsible Federal Budget. (2022). The Fiscal Outlook: 2022 Edition. Washington, DC: Committee for a Responsible Federal Budget.
[2] Joint Committee on Taxation. (2021). Estimates of Federal Tax Expenditures for Fiscal Years 2021–2031. Washington, DC: Joint Committee on Taxation.
[3] Congressional Budget Office. (2019). The Budget and Economic Outlook: 2019 to 2029. Washington, DC: Congressional Budget Office.
[4] Congressional Budget Office. (2018). The Tax Cuts and Jobs Act: An Analysis of the Senate Bill. Washington, DC: Congressional Budget Office.
[5] Tax Policy Center. (2018). Distribution of the Tax Cuts and Jobs Act’s Proposed Individual Income Tax Changes, as Enacted by the Senate. Washington, DC: Tax Policy Center.
- The Tax Cuts and Jobs Act (TCJA) has significantly impacted various sectors, as studies show its provisions have led to an investment boom in the environment, business, and health sectors.
- According to economic forecasts, extending TCJA provisions could potentially save over 6 million jobs, boost aggregate wages, and increase GDP, impacting both the finance sector and individual households across income groups.
- Despite the potential near-term economic stimulus, the long-term budget deficits and fiscal imbalances resulting from TCJA extensions are a concern, as they could lead to higher interest costs and worsen the country's overall financial situation, affecting both the business and history sectors.
[References: Committee for a Responsible Federal Budget (2022), Joint Committee on Taxation (2021), Congressional Budget Office (2019, 2018), Tax Policy Center (2018)]
