Making the Tax Cuts and Jobs Act Permanent: What Small Businesses Need to Consider

The Future of the Tax Cuts and Jobs Act: Analyzing Economic Impacts

The debate around making the Tax Cuts and Jobs Act (TCJA) permanent is heating up, particularly in the lead-up to its provisions set to expire after 2025. Analysts suggest that extending these tax cuts, which include lower rates and wider thresholds for individuals and corporations, could add a boost to the economy but at potentially significant costs to federal revenue.

Estimating the Economic Impact of Permanence

Research indicates that permanently extending the TCJA could increase long-run economic output by 1.1 percent and introduce approximately 847,000 full-time jobs to the market. These outcomes are based on enhanced incentives for work and investment across various sectors, leading to a projected rise in wages and national income. However, this estimated boost comes with a substantial cost—an expected revenue loss of $4.5 trillion over the subsequent decade.

Criticism of Wealth Disparity

Critics of the TCJA argue that the benefits of these tax cuts predominantly favor the wealthy. According to analyses, households in the top 1 percent of earners will gain the most from the tax cuts, while lower-income households will see minimal gains. The disparities are evident—while top income brackets receive substantial tax relief, those in the middle or low income brackets get less than $1,000 in average tax savings, which raises important questions about equitable growth.

Impact on Federal Revenue and Budget Deficits

Beyond just economic output, the TCJA’s permanence could exacerbate the federal deficit, with estimates suggesting an increase in interest costs due to lower tax revenues. This could lead to a deficit surge of $5.4 trillion between 2025 and 2034. The implications for government funding are profound, with potential cutbacks in services and programs that rely on federal support.

The Case for Corporate Tax Cuts

Advocates claim that the initial cut in the corporate tax rate would incentivize businesses to invest and create jobs, theoretically benefiting the wider economy. However, empirical evidence suggests mixed results. While business investment saw a brief spike post-TCJA, many analysts attribute this surge more to short-term economic demand than to sustained improvements driven by the tax cuts themselves.

The Challenge of Measuring Long-Term Outcomes

Long-term predictions regarding the TCJA’s efficacy are complicated by confounding factors such as the post-COVID economic landscape and ongoing global challenges. Necessary adjustments must consider these broader economic conditions as they could significantly alter the landscape in which these tax policies have been enacted.

Conclusion: Weighing the Options

As the time approaches for lawmakers to decide on the TCJA's future, weighing the benefits against the potential for increased inequality and budget deficits is crucial. For CPAs and small to medium businesses, the stakes are high. The long-term sustainability of the economy, the job market, and equitable growth remain at the forefront of this critical legislative discussion.