Both House and Senate Tax Bills Carry Substantial Costs
According to the Joint Committee on Taxation (JCT), the Senate version of the Tax Cuts and Jobs Act (TCJA) will add $1.5 trillion to the debt before accounting for interest or possible gimmicks. As we have noted before, this cost would likely be enough to cause debt to exceed the size of the economy by 2028.
Of the $1.5 trillion cost, the majority – or roughly $900 billion – comes from business tax cuts. Individual tax cuts make up another $500 billion, and the doubling of the estate tax exemption accounts for the remaining $100 billion.
The following table compares the score of the House version of the TCJA as passed by the Ways and Means Committee to the current Senate version. Broadly speaking, much of the content of the bills is very similar. Both bills provide for similar changes in the corporate and international tax code but differ mostly in the structure of the individual tax code, including the tax treatment of pass-through businesses and individual income tax brackets as well as the status of the estate tax.
|Individual Tax Cuts|
|Reduce and/or consolidate individual income tax rates||$1.3 trillion||$1.1 trillion|
|Roughly double the standard deduction||$920 billion||$921 billion|
|Repeal the Alternative Minimum Tax (AMT)||$707 billion||$696 billion|
|Increase the child tax credit and/or create dependent tax credit||$582 billion||$641 billion|
|Subtotal, Individual Tax Cuts||$3.5 trillion||$3.3 trillion|
|Individual Tax Increases|
|Repeal personal exemptions||-$1.6 trillion||-$1.6 trillion|
|Reform itemized deductions||-$1.3 trillion||-$1.3 trillion|
|Use chained CPI to index tax provisions||-$131 billion||-$128 billion|
|Reform higher education tax benefits||N/A||-$65 billion|
|Eliminate certain exclusions||-$7 billion||-$36 billion|
|Require Social Security number to obtain child tax credit||-$24 billion||-$42 billion|
|Other provisions||$10 billion||-$15 billion|
|Subtotal, Individual Tax Increases||-$3 trillion||-$3.1 trillion|
|Business Tax Cuts|
|Reduce corporate tax rate to 20% and repeal corporate AMT||$1.4 trillion||$1.5 trillion|
|Reduce taxes for pass-through businesses||$460 billion||$597 billion|
|Move to territorial system for foreign taxation||$216 billion||$207 billion|
|Reform taxation of intangible property||$121 billion||N/A|
|Move to full expensing of investments for five years||$61 billion||$25 billion|
|Increase small business write-offs||$52 billion||$41 billion|
|Other provisions||$29 billion||$29 billion|
|Subtotal, Business Tax Cuts||$2.3 trillion||$2.4 trillion|
|Business Tax Increases|
|Reduce limit on interest expense deductions||-$308 billion||-$172 billion|
|Enact base erosion or other revenue-raising provisions for foreign taxation||-$271 billion||-$209 billion|
|Enact one-time tax on overseas earnings||-$190 billion||-$293 billion|
|Limit pass-through losses to $250K/$500K||-$176 billion||N/A|
|Limit carryover of net operating losses||-$170 billion||-$156 billion|
|Eliminate domestic production activities deduction||-$81 billion||-$95 billion|
|Limit deductions for meals, entertainment, and transportation||-$40 billion||-$34 billion|
|Reform tax treatment of banks and financial instruments||-$34 billion||-$71billion|
|Limit deferral of gain on like-kind exchanges to real property||-$31 billion||-$31 billion|
|Modify orphan drug tax credit||-$30 billion||-$54 billion|
|Reform tax treatment of executive compensation||-$30 billion||-$13 billion|
|Reform tax treatment of insurance companies||-$27 billion||-$40 billion|
|Eliminate R&E expensing after 2022||N/A||-$109 billion|
|Other changes||-$48 billion||-$50 billion|
|Subtotal, Business Tax Increases||-$1.4 trillion||-$1.3 trillion|
|Reduce and/or Repeal Estate Tax||$94 billion||$151 billion|
|Total||$1.5 trillion||$1.4 trillion|
|Memo: Cost Assuming Extensions||$1.6 trillion||$1.9 trillion|
Source: Joint Committee on Taxation. Note: this table has been updated to reflect JCT's final score of the Ways and Means-passed version of the House bill.
Even these totals may understate the true cost of each bill since the bills include provisions that arbitrarily sunset after five years. Both bills provide full expensing of investments for only five years, while the House bill also provides a $300 filer and dependent credit for five years, small business expensing for five years, and eliminates Research & Experimentation (R&E) expensing after 2022.
The Senate and House leadership haven't provided any rationale as to why these provisions would be temporary, and the economic case for temporary expensing in the current economic environment is quite limited; it seems likely that the expiration dates are intended to artificially reduce the cost of this bill and set up a costly extension later. In light of this, the House bill's elimination of R&E expensing after full expensing is not credible either. Ultimately, both bills rely on these gimmicks to reduce costs, but the House bill leans more heavily on them: it contains roughly $500 billion of gimmicks compared to about $100 billion in the Senate bill.
Though there are a number of differences between the bills, both would add significantly to the debt as written, and neither could be offset with economic growth alone. Instead, lawmakers will need to identify $1.4 trillion to $1.5 trillion of additional base broadening, new revenue, spending cuts, and/or modifications to the proposed tax cuts in the bills to order to make them fiscally responsible.