Question

The Tax Cuts Job Act (TCJA) changed the rules for like-kind exchanges so that they no longer apply to personal property. Discuss why the legislators made this change and whether it will be good for the generation of income tax revenue in the future.

Answer 1

                                                    In December 2017, the Tax Cuts and Jobs Act (TCJA) were signed into law, representing the most significant tax code overhaul in over three decades. Since then, the Tax Foundation has published a number of valuable resources to help you understand what the Tax Cuts and Jobs Act changed and how exactly your wallet, your state, and the U.S. economy will be impacted. Explore the resources below to see how tax reform will impact you.

The Tax Cuts and Jobs Act would reform both individual income and corporate income taxes and would move the United States to a territorial system of business taxation.

                                                          According to the Tax Foundation’s Taxes and Growth Model, the plan would significantly lower marginal tax rates and the cost of capital, which would lead to a 1.7 percent increase in GDP over the long term, 1.5 percent higher wages, and an additional 339,000 full-time equivalent jobs.

                                                     The Tax Cuts and Jobs Act is a pro-growth tax plan, which would spur an additional $1 trillion in federal revenues from economic growth, with approximately $600 billion coming from the bill’s permanent provisions and approximately $400 billion from the bill’s temporary provisions over the budget window. These new revenues would reduce the cost of the plan substantially. Depending on the baseline used to score the plan, current policy or current law, the new revenues could bring the plan closer to revenue neutral.

                                                         Over the next decade, the Tax Cuts and Jobs Act would increase GDP by an average of 0.29 percent per year; GDP growth would be, on average, 2.13 percent, compared to 1.84 percent. In 2018, GDP growth would be 0.44 percent over the baseline forecast.

                                                                On a static basis, the plan would lead to 0.3 percent lower after-tax income on average for all taxpayers and 0.6 percent lower after-tax income on average for the top 1 percent in 2027, due to the expiration of the majority of the individual income tax cuts, but retention of chained CPI. When accounting for the increased GDP, after-tax incomes of all taxpayers would increase by 1.1 percent in the long run.

Impact of Tax cut jobs act

The TCJA changes the business tax base in a multitude of ways, some of which reduce revenue and some of which raise revenue. Considering all of these together, this analysis finds that business tax base changes, on net, raise about $787 billion (i.e., $698 billion plus $89 billion). Thus, almost half of the benefit of the law’s lower tax rates for businesses is offset by changes in the business tax base.

                                       The TCJA’s revenue impact on specific industries

This analysis estimates the TCJA’s revenue effects to vary significantly by industry. When the business sector is disaggregated into six broad industries, tax liability is estimated to decline for each group over the 10-year budget window. These broad industries, which together comprise the entire business sector, are:

1. Agriculture, mining and construction

2. 2. Manufacturing

3. Wholesale and retail trade

4. Transportation, information and utilities

5. Finance, insurance, real estate, rental and leasing

6. Services                                

                                           The TCJA has very different effects on the wholesale and retail trade industry. Trade receives a more sizeable, $283 billion (23%), net tax reduction from the TCJA. Trade’s relatively large net tax cut occurs because for that industry, the estimated $283 billion decrease in tax liability from rate reduction and AMT modification/repeal is offset by no net increase from changes to the business tax base.

On net, base changes have no effect on trade, which is in marked contrast to manufacturing. Trade’s net base change reflects, in turn, the combined influence of a base-broadening effect of $150 billion almost exactly offset by a tax decrease of $150 billion from proposals that narrow the tax base.

Looking further into the relative importance of the major base changes for trade, there are further large differences compared to manufacturing. The one-time tax on repatriated earnings has little effect on the trade industry, nor does the restriction on the deductibility of interest expense. Instead, for trade, the largest single base-increasing proposal is the BEAT. And, also in contrast to manufacturing, for trade, close to one-half of the decrease in tax liability from changes in the tax base is from the deduction of qualified business income ($63 billion), a provision which had only a relatively minor effect on manufacturing.