Analysis: Tax Cuts and Jobs Act Pays For Itself With Economic Growth

House tax reform proposal projected to increase gross domestic product by 0.7 percent

Speaker of the House Paul Ryan and Senate Majority Leader Mitch McConnell / Getty Images

The Tax Cuts and Jobs Act proposed by both the House and the Senate will pay for itself by generating higher economic growth, according to an analysis from the Tax Foundation.

The Joint Committee on Taxation released a report showing the House tax reform proposal would increase gross domestic product by about 0.7 percent on average over the next decade.

"In general, tax policy affects economic growth by changing incentives for owners of capital to invest and for potential workers to supply labor to the economy, and by changing the after-tax rates of return—either directly by changing the amount of payments going to taxes, or indirectly, by changing aggregate demand, which can change gross payments for output," the committee explains.

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"The projected increase in GDP during the budget window results both from an increase in labor supply, in response to the reduction in effective marginal tax rates on wages, and from an increase in investment in response to the reduction in the after-tax cost of capital."

Critics of the plan argue that because the committee estimates that revenue will decline from about $1.5 trillion to $1 trillion, the plan does not pay for itself.

"Whether a tax plan ‘pays for itself' is not the right measure for any tax plan," the Tax Foundation explains. "The proper measure is whether it increases the size of the economy, especially relative to any revenue loss it may incur for the federal treasury."

The foundation says both plans proposed by the House and Senate are a net winner for creating more GDP growth than the plans will lose in revenue. The House plan is projected to increase GDP by 0.7 percent and will add $1.67 trillion in economic growth over the next decade. The Senate plan is projected to increase GDP by 0.8 percent and will add $1.91 trillion in economic growth over the next decade. Under both plans, revenue loss will total $1 trillion over the next decade.

"From a purely economic standpoint, it is easy to see that the plans do pay for themselves by generating more GDP than the amount of revenues lost to the treasury," the Tax Foundation says. "While the plans may not generate enough new revenues to fully offset the loss to the treasury, the gains to GDP certainly make this trade-off worth the cost."