MACROECONOMIC ANALYSIS OF THE “TAX CUT AND JOBS ACT” 

AS ORDERED REPORTED BY THE SENATE COMMITTEE

ON FINANCE ON NOVEMBER 16, 2017

Prepared by the Staff

of the

JOINT COMMITTEE ON TAXATION

November 30, 2017

JCX-61-17
1

INTRODUCTION

Pursuant to section 4107 of the Concurrent Resolution on the Budget for Fiscal Year 

2018, this document,

1 prepared by the staff of the Joint Committee on Taxation, provides an 

analysis of the of macroeconomic effects of the Tax cut and Jobs Act as reported by the Senate 

Finance Committee on November 16, 2017, and their impact on the Federal budget. 

 

1

 This document may be cited as follows: Joint Committee on Taxation, Macroeconomic Analysis of the 

“Tax Cut and Jobs Act” as Ordered Reported by the Senate Committee on Finance on November 16, 2017

(JCX-61-17), November 30, 2017. This document can also be found on the Joint Committee on Taxation website at 

www.jct.gov. 
2

MACROECONOMIC ANALYSIS OF THE TAX CUT AND JOBS ACT AS ORDERD 

REPORTED BY THE SENATE FINANCE COMMITEE

This report provides an analysis of the macroeconomic effects of a proposal to reform the 

Internal Revenue Code (“Code”). Specifically, the proposal analyzed here is the one summarized 

in JCX-59-17, “Estimated Revenue Effects of the ‘Tax Cuts and Jobs Act,’ As Ordered Reported 

by the Committee on Finance on November 16, 2017.” We estimate that this proposal would 

increase the level of output (as measured by Gross Domestic Product) by about 0.8 percent on 

average over the 10- year budget window. That increase in income would increase revenues, 

relative to the conventional estimate of a loss of $1,414 billion (provided in JCX-59-17) by $458

billion over that period. This budget effect would be partially offset by an increase in interest 

payments on the Federal debt of about $50 billion over the budget period. We expect that both 

an increase in GDP and resulting additional revenues would continue in the second decade after 

enactment, although at a lower level, as many of the provisions that are expected to increase 

GDP within the budget window expire before the second decade.

The following discussion analyzes the macroeconomic effects of the bill. The estimate of 

the macroeconomic revenue feedback effects of this legislation and the following supplementary 

analysis were produced using three macroeconomic simulation models to simulate the 

macroeconomic effects of the bill: (1) the Joint Committee staff’s Macroeconomic Equilibrium 

Growth (“MEG”)2 model; (2) an overlapping generations model (“OLG”);3 and (3) a dynamic 

stochastic general equilibrium model (“DSGE”).4 A brief description of the models and the 

parameter values for each used in this analysis appear in the Appendix to this document. 

This analysis is presented relative to the 2017 economic and receipts baseline (“present 

law”), published by the Congressional Budget Office (“CBO”) in January, 2017.5

 2

 A detailed description of the MEG model may be found in: Joint Committee on Taxation, 

Macroeconomic Analysis of Various Proposals to Provide $500 Billion in Tax Relief, (JCX-4-05), March 1, 2005, 

and Joint Committee on Taxation, Overview of the Work of the Staff of the Joint Committee on Taxation to Model 

the Macroeconomic Effects of Proposed Tax Legislation to Comply with House Rule XIII3(h)(2), (JCX-105-03), 

December 22, 2003.

3

 The OLG model currently used by JCT is leased from Tax Policy Advisors, LLC. Information about this 

model may be found in John W. Diamond and George R. Zodrow, Modeling U.S. and Foreign Multinationals in an 

OLG-CGE Model, Baker Institute for Public Policy, Rice University, working paper, 2015; and in G.R. Zodrow and 

J.W. Diamond, “Dynamic Overlapping Generations Computable General Equilibrium Model and the Analysis of 

Tax Policy: the Diamond-Zodrow Model,” in P.B. Dixon and D.W. Jorgenson (eds.) Handbook of Computable 

General Equilibrium Modeling, vol. 1A, pp. 743-813, North-Holland, 2013. 

4

 A description of an earlier version of the DSGE model may be found in: Joint Committee on Taxation, 

Background Information about the Dynamic Stochastic General Equilibrium Model Used by the staff of the Joint 

Committee on Taxation in the Macroeconomic Analysis of Tax Policy, JCX-52-06, December 14, 2006. An updated 

document, which describes modeling improvements, is forthcoming.

5

 Congressional Budget Office, The Budget and Economic Outlook: 2017-2027, January 24, 2017.
3

Proposal

The bill changes individual income tax rates, lowering the top individual income tax rate 

from 39.6 percent to 38.5 percent, creating an additional individual income tax rate bracket, and 

lowering statutory tax rates for most tax rate brackets, while changing the measure used to adjust 

the brackets for inflation from the present law consumer price index (“CPI-U”) to the chained 

consumer price index (“chained CPI”). The chained CPI grows more slowly than the CPI-U, thus 

resulting in people over time moving into higher rate brackets at a faster rate under the bill than 

under present law. The bill also reduces individual shared responsibility payments for failure to 

obtain qualified health insurance coverage enacted as part of the affordable care act to zero. At 

the same time, the proposal eliminates a number of deductions and credits from their individual 

taxable income while increasing others. The biggest changes include eliminating personal 

exemptions while increasing the standard deduction, and increasing the maximum amount of the 

child tax credit while increasing the income range over which individuals may claim it. Finally, 

the bill generally doubles the exemption amount for the Estate, Gift, and Generation Skipping 

Transfer tax. Except for the switch from CPI-U to chained CPI for indexing tax brackets, and 

setting the ACA individual shared responsibility payments to zero, all of these changes to the 

taxation of individuals sunset after December 31, 2025.

The bill also makes substantial changes to the taxation of business income. Individuals 

receiving income from certain pass-through businesses may deduct 17.4 percent of that income 

from their individual income tax; like most of the other provisions affecting individual income 

tax filers, this deduction would sunset after 2025. In addition, the bill lowers the corporate 

income tax rate from 35 percent to 20 percent beginning in 2019; and, it increases the rate of 

bonus depreciation to 100 percent while extending it for five years, from 2018 through 2022. The 

bill also repeals or limits deductions for a number of business expenses, the largest of which is a 

30 percent limit on interest deductibility. Finally, the bill makes significant changes to the 

taxation of both foreign and domestically controlled multinational entities. It would allow 

domestic corporations to receive a dividend from their foreign subsidiaries without incurring

United States tax on the income. It also creates a new minimum tax for certain related party 

transactions in order to reduce the erosion of the United States corporate income tax base. In a 

further effort to reduce base erosion, it equalizes the tax treatment of specified high return 

income from foreign sales whether they are earned through a foreign corporation or a domestic 

corporation.

Overall, the net effect of the changes to the individual income tax is to reduce average tax 

rates on wage income by about one percentage point, while reducing effective marginal tax rates 

on wages by about 2.4 percentage points. The changes in the taxation of income from capital, 

the extension and expansion of bonus depreciation, and the reduction in tax rates on business 

income (both for corporations and for pass-through businesses) result in a reduction in the aftertax cost of capital investment, and thus an increase in the after-tax rate of return on business 

investment. This incentive begins to decline toward the end of the 10-year budget period because 

of the expiration of both 100 percent bonus expensing and the extra deduction for pass-through 

income, and because interest rates begin to rise as Federal debt increases due to the proposal.
4

Effects on output

We estimate that the proposal would increase the level of GDP relative to the baseline 

forecast, by 0.8 percent on average throughout the ten-year budget window. 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, by changing the after-tax rates of return to 

these two factors of production. Changes in tax policy can alter these 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 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. Because of the expiration of individual 

income tax rate cuts and other provisions affecting wage taxation after 2025, the increase in labor 

supply is expected to decline, and possibly reverse, after 2025. Similarly, the expiration of bonus 

depreciation and the special deduction for pass-through income are expected to slow the rate of 

new investment toward the end of the budget window. As a result, the increase in output is 

expected to be smaller towards the end of the budget window.

Effects on capital stock

The amount of capital available for production is expected to be about 1.1 percent higher 

on average over the budget window than in the baseline forecast. During the budget window, 

increased investment primarily due to the reduction in the corporate tax rate, the five-year 

extension of bonus depreciation at 100 percent, and the added tax deduction for certain passthrough business income results in a gradual accumulation of capital stock, which is forecast to 

reach its peak toward the end of the budget period. Somewhat offsetting this effect in the second 

half of the budget period is the effect of the growing deficit on interest rates, as well as the sunset 

of bonus depreciation and the extra deduction for certain pass-through income. 

Effects on employment and supply of labor 

The significant reduction in marginal tax rates on labor (resulting primarily from the 

additional tax rate bracket, lower statutory rates for most brackets, and the increase in the child 

credit and its phaseout range) provide strong incentives for an increase in labor supply. Because 

the reduction in marginal tax rates is reversed at the end of the budget window, after most of the 

changes to taxation of individual income have sunset, the timing and strength of the labor supply 

response varies significantly depending on how much foresight individuals are assumed to have 

about the future path of marginal tax rates. The more foresight individuals are assumed to have, 

the more they are forecast to shift their labor effort into the timeframe when marginal tax rates 

are temporarily low. On average, employment is projected to increase by about 0.6 percent 

relative to baseline levels during the budget period. After the sunset of the individual tax 

provisions, the increase in employment is expected to decline.

Effects on consumption

The additional income generated by additional capital and labor - combined with the 

decreased tax liability owing to the proposal - provide individuals with more disposable income, 
5

thus increasing consumption. We estimate that consumption would be increased by 0.6 percent 

on average during the budget window, relative to baseline levels of consumption. 

Effects of doubling the exemption for the estate, gift, and generation skipping transfer tax

Evidence from economic empirical and theoretical research on the effects of the estate 

tax on economic growth is very mixed. On the one hand, to the extent that an individual’s labor 

effort and investment behavior is driven by a desire to maximize the amount of wealth to be left 

to heirs, an increase in amounts exempted from the estate tax would increase the marginal value 

to him of providing these additional resources to the economy; if this were the only behavioral 

response to the estate tax, the increased exemption would be expected to increase growth. 

However, it is also possible that individuals subject to the estate tax desire to leave a specific 

dollar amount to their heirs; in this case, an increased exemption would allow them to reach that 

target amount more quickly, thus reducing their incentive to work and invest. In addition, to the 

extent that the increased exemption from this tax increases the amount of income received by 

heirs, this could reduce the labor supply and savings of the heirs, thus reducing the amount of 

growth in the economy. Because of the uncertainty associated with the effects of the estate tax on 

growth from labor and investment incentives, the increase in the exclusion from the estate tax is 

incorporated in JCT macro models as a reduction in the average tax rate on individual income, 

and as having no effect on marginal tax rates, which are the main drivers of behavioral response 

in JCT macroeconomic models. Thus, the effects of the estate tax repeal are primarily a small 

increase in consumption, and a negligible change in GDP and other macroeconomic aggregates.6

Effects of changes in the treatment of income from foreign activity

The proposal changes the taxation of both foreign and domestically controlled multinational corporations in order to limit erosion of the corporate income tax base.

To some extent, under present law, base erosion occurs because firms are able to attribute 

their profits to low-tax countries and their costs to the United States without changing the 

location of their economic activity. The proposals affecting taxation of foreign activity are 

expected to reduce the incentives for this “profit-shifting” activity, thus resulting in an increase 

in the U.S. tax base. The conventional revenue estimates for these provisions include the effects 

of reducing profit shifting. The effects of these types of provisions on incentives to locate 

economic activity in the United States are included in the macroeconomic analysis and feedback 

estimate. The macroeconomic estimate projects an increase in investment in the United States, 

both as a result of the proposals directly affecting taxation of foreign source income of U.S. 

multi-national corporations, and from the reduction in the after-tax cost of capital in the United 

States due to more general reductions in taxes on business income.

 6

 For a brief discussion on ramifications of estate taxation, see Joint Committee on Taxation, The Taxation

of Individuals and Families (JCX-41-17), September 12, 2017, pp. 47-48, and for additional data and a more 

detailed discussion of economic issues, see Joint Committee on Taxation, History, Present Law, and Analysis of the 

federal Wealth Transfer Tax System (JCX-52-15), March 16, 2015, pp. 24-46.
6

Budgetary effects

Fiscal years 2018-2027

The estimate of the impact of the growth effects from this proposal on its overall budget 

effects was produced using a weighted average of those effects generated by the MEG, OLG, 

and DSGE models. The OLG and MEG models are each assigned a weight of 0.4, while DSGE 

is assigned a weight of 0.2. As described in the Appendix, each model provides a somewhat 

different perspective on savings/investment responses and international capital flows. The OLG 

model provides some focus on shifting of investment between domestic and multinational 

corporations, as well as within multinational corporations across borders, but requires a fiscal 

balance assumption. The MEG model allows simulation of the proposal as drafted, with no 

offsetting fiscal balance assumption, and it models cross-border capital flows that can partially 

offset the effects of a growing deficit on interest rates. The DSGE model is included because, 

although does not model cross-border flows, it does model separate investment responses by 

savers and non-savers. It also adds imperfect foresight to the analysis, an assumption sitting 

between the perfect foresight assumption of the OLG model and the myopic foresight in the 

MEG model. The foresight assumption is particularly important for analyzing the effects of 

temporary provisions. The growth generated by the proposal is projected to reduce the revenue 

loss from the proposal by about $458 billion over the 2018-2027 budget period. At the same 

time, an increase in interest rates generated by the increase in Federal debt is expected to 

increase the cost of Federal debt service by about $51 billion over the budget window. Overall, 

the budgetary effects of changes in economic growth are projected to reduce the deficit by $407

billion during the budget window. Details of the estimate appear on Table 1, on the next page.

Second and third decade effects

In the second decade after enactment, the direct tax incentives for increased labor effort 

that contributed to the projected increase in GDP during the ten-year budget window are 

reversed, with the expiration of reduced individual income tax rates and the continuing effect of 

indexing tax brackets by chained CPI of moving people to higher tax brackets more quickly than 

they would be moved under present law. The combination of increased revenues due to chained 

CPI and continuing savings due to reducing individual shared responsibility payment amounts to 

zero slow the growth of the deficit in the second and third decades. However, the continuation of

chained CPI provision coupled with the sunset of most other individual provisions result in an 

increased marginal tax rate on labor, dampening labor supply incentives, and reducing the 

increase in GDP relative to projected baseline levels. The permanent reduction in the corporate 

income tax rate continues to provide an incentive for increased investment and GDP in the 

second decade, but the increase in debt created during the budget period is expected to continue 

to exert some upward pressure on interest rates. Combined with reduced labor supply due to 

increasing tax rates on labor, the upward pressure on interest rates is projected to partially or 

wholly offset investments incentives by the end of the third decade.
7

- TABLE 1 -

ESTIMATED BUDGET EFFECTS OF A 

POSSIBLE TAX REFORM PROPOSAL

Fiscal Years 2018 - 2027

[Billions of Dollars]

Provision 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2018-22 2018-27

Conventional estimate............ -38.4 -224.5 -246.9 -217.5 -198.6 -167.0 -140.7 -145.1 -64.2 30.6 -926.3 -1,414.2

Additional Effects Resulting from Macroeconomic Analysis .................. 9.9 35.7 39.8 41.5 42.6 50.3 55.1 56.1 38.8 37.7 238.0 407.5

NET TOTAL 

..........................................................................................

-28.5 -188.8 -207.1 -176.0 -156.0 -116.7 -85.6 -89.0 -25.4 68.3 -756.8 -1006.7

Joint Committee on Taxation

--------------------------------------

NOTE: Details may not add to totals due to rounding.
8

APPENDIX: DATA, MODELS, AND ASSUMPTIONS

USED IN THEANALYSIS

The Joint Committee staff analyzed the proposal using the Joint Committee staff MEG 

and DSGE models and an OLG model. While the models are based on economic data from the 

National Income and Product Accounts, taxable income is adjusted to reflect taxable income as 

measured by reporting on tax returns. All three models start with the standard, neoclassical 

production framework in which the amount of output is determined by the quantity of labor and 

capital used by firms, and the productivity of those factors of production; long run aggregate 

demand equals aggregate supply at full employment. Both individuals and firms are assumed to 

make decisions based on observed characteristics of the economy, including wages, prices, 

interest rates, tax rates, and government spending levels. In particular, the amount of labor 

available to the economy is affected by individuals’ understanding of their after-tax returns to 

working, which depends on both wage rates and tax rates. Similarly, the amount of capital 

available to the economy is determined by investors’ predictions of after-tax returns to capital, 

which depend on anticipated gross receipts, costs of factor inputs, and tax rates that affect those 

factors. The underlying structure of the MEG model relies more on reduced form behavioral 

response equations, while the OLG and DSGE models incorporate more theoretical 

microeconomic foundations.

The degree to which the Joint Committee staff relies more heavily on the results of one 

model versus the others depends on the specifics of the proposal being analyzed. The MEG 

model, which does not require a fiscal balance assumption, is better suited to analyze proposals 

that produce large, conventionally estimated deficits. This model allows for the modeling of four 

separate types of labor, and of separate marginal and average tax rates for all major individual 

and business income tax sources; while the other two models treat average and marginal rates the 

same for individual income other than wages. The availability of investment capital to firms is 

determined by individuals’ savings response to changes in the after-tax rate of return on 

investment as well as by foreign capital flows. Also in the MEG model, monetary policy 

conducted by the Federal Reserve Board is explicitly modeled, with delayed price adjustments to 

changes in economic conditions allowing for the economy to be temporarily out of equilibrium 

in response to fiscal and monetary policy. The monetary policy response function used in this 

analysis assumes that the Fed will act aggressively to counteract any demand stimulus resulting 

from the proposal because the economy is expected to be operating near full employment. The 

myopic expectation framework in the MEG model represents the extreme case of the degree of 

foresight individuals have about future economic conditions, in which individuals assume in 

each period that current economic conditions will persist permanently.

At the other end of the foresight spectrum, in the OLG model, individuals are assumed to 

make consumption and labor supply decisions to maximize their lifetime well-being given the 

resources they can foresee will be available to them. They are assumed to have complete 

information, or “perfect foresight,” about economic conditions, such as wages, prices, interest 

rates, tax rates, and government spending, over their lifetimes. OLG represents a class of models 

with “micro-foundations” and life-cycle effects modeled separately for each of a number of 

“generations” (in this case 55). Taxes on labor affect the decisions of each cohort by impacting 

the trade-off between consumption and leisure. Individuals substitute between labor and leisure 

both contemporaneously and over time. The OLG model includes a more differentiated business 
9

sector than the other two models. Firms’ investment decisions respond to the effects of tax policy 

on the projected future value of the firm. Changes in marginal tax rates on firm profits, and 

changes in the value of deductions for investment affect this future valuation. 

The stochastic feature of the DSGE model allows for some analysis of the effects of 

uncertainty about future fiscal policy on the modeling outcome, representing a less extreme 

foresight assumption than either of the other models. As the uncertainty about future fiscal 

conditions is allowed to persist over a limited period of time, DSGE is closer to OLG than to 

MEG on this spectrum. In DSGE there are two types of individuals who make decisions about 

labor supply, only one of whom has the liquidity to make investment decisions (“savers and nonsavers”). As in the OLG model, these two types of individuals make consumption and labor 

supply decisions to maximize their discounted present value of consumption over time, including 

consumption of leisure. The savers supply investment capital to the economy, and receive 

income from investment returns. The non-savers are liquidity constrained, and are unable to 

invest. The existence of these two types of individuals allows for some explicit distributional 

analysis of taxes on investment versus taxes on labor. In addition, changes to transfers and taxes 

on the non-saving households will have direct effects on current period consumption and the 

current level of output. These features of the DSGE model allow the model to interpret real short 

run effects of economic policy changes.

Information about the effects of the proposal on individual and business average tax rates 

and effective marginal tax rates, and on after-tax returns to capital and labor is obtained from 

various Joint Committee staff tax models7 (used in the production of conventional revenue 

estimates) to characterize the effects of the bill within the each of the models. Changes in 

deductions, credits and exclusions can impact effective marginal tax rates as well as average tax 

rates. Tables 2-4 provide a summary of key behavioral parameters used in the each of the models 

for the analysis of this proposal. 

 7

 Descriptions of the JCT conventional estimating models may be found in JCX-46-11, Testimony of the 

Staff of the Joint Committee on Taxation before the House Committee on Ways and Means Regarding Economic 

Modeling, September 21, 2011, JCX-75-15, Estimating Changes in the Federal Individual Income tax: 

Description of the Individual Tax Model, April 24, 2015, and other documents at www.jct.gov under “Estimating 

Methodology.”
10

Table 2: Key Parameter Assumptions in the MEG Model

Labor supply elasticities in disaggregated labor supply Income Substitution

Low income primary -0.1 0.2

0.1

0.8

0.6

0.2

Other primary -0.1

Low income secondary -0.3

Other secondary -0.2

Wage-weighted population average with baseline rates -0.1

Savings/consumption parameters

Rate of time preference 0.015

Intertemporal elasticity of substitution 0.35

Derived long-run savings elasticity to the after rate of 

return on capital 0.25

Table 3: Key Parameter Assumptions in the

DSGE Model

Frisch elasticity of labor supply 0.20

Production income share of capital 36%

Fraction of savers 48%

Monetary authority response to inflation 1.55

Monetary authority response to output 0.05

Quarterly subjective discount factor 0.9975

Constant relative risk aversion parameter

on utility from consumption 2.15

Intermediate firm markup 13%

Probability of price reset 50%
11

Table 4: Key Parameter Assumptions in the OLG Model

Time preference 0.005

Intertemporal elasticity of substitution 0.4

Intratemporal elasticity of substitution between consumption and leisure 0.6

Leisure share of time endowment 0.4026

Population growth rate 0.008

Technological growth rate 0.019

Capital share for:

Corporate 0.2

Multinational (not including IP) 0.15

Non-corporate 0.3

Housing 0.985

Adjustment cost* 2.0

Debt-to-capital ratio (average) 0.35

Substitution elasticity between capital and labor in

Non-housing** 1.0

Housing** 1.0

Substitution elasticity for intellectual property**** 1.0

* Quadratic adjustment cost function

** Cobb-Douglas production function

*** Substitution elasticity between foreign and domestic after- tax profits attributable to intellectual

 property