Faculty Expert: An Economist Examines the Tax Cuts and Jobs Act
Monday, January 15, 2018
A few weeks into the New Year, many Americans are already dutifully filing their 2017 taxes. However, under the new Tax Cuts and Jobs Act (TCJA), it’s difficult to know what to expect.
“There are so many changes in the new tax bill,” says Nancy Fox, Ph.D., associate professor of economics at Saint Joseph’s University in Philadelphia, “that it’s hard to pinpoint the effects it will have on the individual level.”
While Fox believes individuals in most tax brackets may pay less in taxes, the proportional savings for individuals with the highest incomes is significantly greater. Citing a report by the Tax Policy Center, she says that people with income under $25,000 per year will see a 0.4 percent increase in after-tax income — an average savings of about $60. In turn, individuals in the top 95 to 99 percent income bracket could expect a 4.1 percent increase in after-tax income with an average savings of $13,480.
One of the bill’s more controversial provisions limits the mortgage interest deduction (MID) to mortgages under $750,000 — down from the current $1 million. Fox explains that someone who pays $1,000 per month in rent gets no subsidy; however, a homeowner with a $1,000 mortgage payment can deduct the interest on that payment from their taxes.
“The MID has been around for over one hundred years,” says Fox. “In effect, it subsidizes housing for wealthy people. According to a Pew study, the deduction cost the federal government $77 billion in 2016.”
In considering the macro-level implications for the TCJA, Fox raises concerns over its effect on the federal deficit. “There is disagreement about the plan’s ‘dynamic score’ — the cost of the tax cut after accounting for economic growth,” she says.
According to Fox, U.S. Treasury Secretary Steven Mnuchin and Chief Economic Advisor Gary Cohn claim the tax cuts will generate enough economic growth that the deficit will not increase. Yet, she says a poll from the University of Chicago indicates that only two percent of economists surveyed believe that the country’s GDP will be substantially higher in ten years as a result of the TCJA. Fox also cites studies by the Joint Committee on Taxation, Goldman Sachs, the University of Pennsylvania’s Wharton School and the Tax Foundation, which estimate only modest economic growth.
“All studies predict that the deficit will grow,” Fox concludes, “anywhere from half a trillion to one trillion dollars over 10 years.”
Associate Professor of Economics Nancy Fox, Ph.D., is an expert in economics and ethics. She can be reached for comment at email@example.com or by contacting the Office of Marketing and Communications at 610-660-3240.