What does the Senate’s Tax Cuts and Jobs Act mean for Minnesota?
The impact on the United States
For the United States as a whole,
Using the Tax Foundation’s Taxes and Growth (TAG) macroeconomic model, our analysis found that “the plan would significantly lower marginal tax rates and the cost of capital, which would lead to a 3.7 percent increase in GDP over the long term [and] 2.9 percent higher wages.”
The TAG model estimates that the plan would result in the creation of roughly 925,000 new full-time equivalent (FTE) jobs, while increasing the after-tax incomes by 4.4 percent in the long run, meaning families would see an after-tax income boost of 4.4 percent by the end of the decade. The increase in family incomes is due in part from individual income tax reductions and the broader rise in productivity and wages due to economic growth. These estimates take into account all aspects of the Senate version of the Tax Cuts and Jobs Act, including changes to the individual and corporate tax codes.
The impact on Minnesota
For Minnesota, the Tax Foundation estimated an increase of 18,524 new FTE jobs. In a tight labor market, this could be expected to boost wages. They also estimate an increase of $3,090 in annual after-tax incomes, well above the national average and the tenth highest boost in the country.
But what about spending?
This is not an endorsement of the Bill. It has some admirable features, such as reducing the number of brackets and lowering the corporate income tax. But taxation (income) is only one half of the federal government’s fiscal equation. As the Congressional Budget Office (CBO) periodically makes clear with its forecasts, rising entitlement spending is set to drive an increase in federal spending in years to come which taxation will not cover. This will mean federal budget deficits and increased debt. As the CBO noted in March,
If current laws generally remained unchanged, federal debt as a percentage of GDP would reach unprecedented levels because the gap between spending and revenues would continue to widen. CBO projects that debt would rise to 89 percent of GDP by 2027, and eight years later, in 2035, it would surpass the peak of 106 percent recorded in 1946. By 2047, federal debt would reach 150 percent of GDP—significantly larger than the average of the past five decades—and it would be on track to grow even larger.
It is amazing that this looming crisis isn’t a bigger story than it is. To tackle this problem, the federal government needs to get serious about spending.
John Phelan is an economist at Center of the American Experiment.