Temporarily Affordable or Permanently Costly? The Trillion-Dollar Question of the American Families and Jobs Act
As the House Ways and Means Committee gears up to examine the American Families and Jobs Act, a piece of legislation aimed at extending certain business tax provisions while introducing a broadened standard deduction, the fiscal implications of this legislative proposal are coming under scrutiny. The Act, designed to be temporary in nature, also contemplates the repeal of specific energy tax credits from the Inflation Reduction Act, along with other reforms. On the surface, this would appear to result in a bill costing around $80 billion over ten years, inclusive of interest ($19 billion before interest), and $320 billion through the end of fiscal 2025.
However, as with any economic policy, the devil is in the details. The 10-year cost, smaller than one might anticipate, is largely a consequence of the temporary nature of many of the bill's tax cuts, set to expire by the end of 2025. If these temporary tax cuts and extensions were to be made permanent, the cost of the plan could escalate to over $1.1 trillion ($950 billion without interest) through 2033.
The financial load of the bill, whether temporary or permanent, is expected to be somewhat front-loaded. This is due to the time-bound nature of some of the tax breaks and because the offsets, in part, come from repealing tax credits that take effect later in the decade. Per estimates by The Committee for a Responsible Federal Budget, the plan could cost over $80 billion in 2023, and by 2025, costs could hit $130 billion. After a decade, however, deficit reduction kicks in, dropping federal outlays by $30 billion per year. All of these figures assume that temporary tax provisions are not made permanent.
With inflation high and debt nearing record levels, policymakers would do well to tread carefully. Any tax cuts that exacerbate the deficit in the short or long term could lead to economic complications.
In light of these considerations, it's vital that policymakers and economists keep a watchful eye on the potential impact of these legislative decisions. As we've seen in the past, even seemingly manageable economic conditions can deteriorate rapidly, potentially outpacing the ability of Congress or the Federal Reserve to implement corrective measures. Brace yourselves, as these decisions could mark the beginning of a fiscal dip. And while we may not anticipate a major recession, the confluence of these trends suggests an increased probability of economic contraction. As always, it's better to prepare than to be caught off guard.
Dr. Justin Vélez-Hagan, Ph.D., is an economist, business owner and investor, and author of The Paradox of Fiscal Austerity, among others. He is also an appointed member of the Joint Advisory Board of Economists for the state of Virginia.
Sources:
https://www.crfb.org/blogs/wm-tax-bill-would-cost-over-1-trillion-if-made-permanent
https://republicans-waysandmeansforms.house.gov/news/email/show.aspx?ID=YLEXNAAQYIXC2ZAKNZBRJCLEZU