U.S. GOVERNMENT PUBLISHING OFFICE

35–567 WASHINGTON : 2019

HEARING ON 2017 TAX LAW: IMPACT ON 

THE BUDGET AND AMERICAN FAMILIES 

HEARING 

BEFORE THE

COMMITTEE ON THE BUDGET 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED SIXTEENTH CONGRESS 

FIRST SESSION 

HEARING HELD IN WASHINGTON, D.C., FEBRUARY 27, 2019 

Serial No. 116–3 

Printed for the use of the Committee on the Budget 

( 

Available on the Internet: 

www.govinfo.gov 


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(II) 

COMMITTEE ON THE BUDGET 

JOHN A. YARMUTH, Kentucky, Chairman 

SETH MOULTON, Massachusetts, 

Vice Chairman 

HAKEEM S. JEFFRIES, New York 

BRIAN HIGGINS, New York 

BRENDAN F. BOYLE, Pennsylvania 

RO KHANNA, California 

ROSA L. DELAURO, Connecticut 

LLOYD DOGGETT, Texas 

DAVID E. PRICE, North Carolina 

JANICE D. SCHAKOWSKY, Illinois 

DANIEL T. KILDEE, Michigan 

JIMMY PANETTA, California 

JOSEPH D. MORELLE, New York 

STEVEN HORSFORD, Nevada 

ROBERT C. ‘‘BOBBY’’ SCOTT, Virginia 

SHEILA JACKSON LEE, Texas 

BARBARA LEE, California 

PRAMILA JAYAPAL, Washington 

ILHAN OMAR, Minnesota 

ALBIO SIRES, New Jersey 

SCOTT H. PETERS, California 

JIM COOPER, Tennessee 

STEVE WOMACK, Arkansas, 

Ranking Member 

ROB WOODALL, Georgia 

BILL JOHNSON, Ohio, 

Vice Ranking Member 

JASON SMITH, Missouri 

BILL FLORES, Texas 

GEORGE HOLDING, North Carolina 

CHRIS STEWART, Utah 

RALPH NORMAN, South Carolina 

CHIP ROY, Texas 

DANIEL MEUSER, Pennsylvania 

WILLIAM R. TIMMONS IV, South Carolina 

DAN CRENSHAW, Texas 

KEVIN HERN, Oklahoma 

TIM BURCHETT, Tennessee 

PROFESSIONAL STAFF

ELLEN BALIS, Staff Director 

DAN KENIRY, Minority Staff Director 


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CONTENTS 

Page 

Hearing held in Washington D.C., February 27, 2019 ......................................... 1 

Hon. John A. Yarmuth, Chairman, Committee on the Budget .................... 1 

Prepared statement of ............................................................................... 4 

Hon. Steve Womack, Ranking Member, Committee on the Budget ............. 8 

Prepared statement of ............................................................................... 10 

Hon. Sheila Jackson Lee, Member, Committee on the Budget, statement 

submitted for the record ............................................................................... 13 

Hon. Chip Roy, Member, Committee on the Budget, statement submitted 

for the record ................................................................................................. 19 

William G. Gale, Ph.D., Arjay and Frances Fearing Miller Chair in Federal Economic Policy, Brookings Institution and Co-Director of Tax 

Policy Center ................................................................................................. 20 

Prepared statement of ............................................................................... 22 

Chye-Ching Huang, Director of Federal Fiscal Policy, Center on Budget 

and Policy Priorities ..................................................................................... 27 

Prepared statement of ............................................................................... 29 

Caroline Bruckner, Executive-in-Residence, Accounting and Taxation 

Managing Director, Kogod Tax Policy Center Kogod School of Business, 

American University ..................................................................................... 42 

Prepared statement of ............................................................................... 44 

Lana K. Pol, President/Owner, Geetings, Inc. ............................................... 55 

Prepared statement of ............................................................................... 57 

Hon. Janice D. Schakowsky, Member, Committee on the Budget, article 

submitted for the record ............................................................................... 83 

Additional Materials: ...............................................................................................

William G. Gale, Brookings Institution, Tax Policy Center, article submitted for the record ..................................................................................... 99 

Caroline Bruckner, Executive-in-Residence, Accounting and Taxation 

Managing Director, Kogod Tax Policy Center Kogod School of Business, 

American University, exhibit submitted for the record ............................. 122 

Hon. Janice D. Schakowsky, Member, Committee on the Budget, CBO 

report submitted for the record ................................................................... 126 


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HEARING ON 2017 TAX LAW: IMPACT ON 

THE BUDGET AND AMERICAN FAMILIES 

WEDNESDAY, FEBRUARY 27, 2019 

HOUSE OF REPRESENTATIVES, COMMITTEE ON THE BUDGET, Washington, D.C. 

The Committee met, pursuant to notice, at 10:06 a.m., in Room 

210 Cannon House Office Building, Hon. John A. Yarmuth [Chairman of the Committee] presiding. 

Present: Representatives Yarmuth, Scott, Doggett, Jackson Lee, 

Schakowsky, Higgins, Peters, Sires, Panetta, Horsford, Omar; 

Womack, Flores, Johnson, Woodall, Smith, Hern, Burchett, Crenshaw, and Meuser. 

Chairman YARMUTH. The hearing will come to order. I would like 

to begin with an announcement. I am pleased to announce that Mr. 

Seth Moulton is designated as the new vice chair of the committee. 

I look forward to working with Vice Chair Moulton and welcome 

his leadership. 

And now I want to welcome everyone to the Budget Committee 

hearing. This hearing will focus on the impact of the 2017 tax law 

on the budget and on American families. I especially want to thank 

our great panel for being with us this morning. 

Today, we will be hearing from Dr. William Gale, Arjay and 

Francis Miller Chair in Federal Economic Policy at the Brookings 

Institution and co-director of the Tax Policy Center. We will hear 

from Chye-Ching Huang, director of federal fiscal policy at the Center on Budget and Policy Priorities. We welcome Caroline Bruckner, professor at American University and the managing director 

of the Kogod Tax Policy Center. And Lana Pol, president of 

Geetings, Inc., headquartered in Pella, Iowa. 

Now, I yield myself five minutes for my opening statement. 

Once again, welcome to our witnesses. I want to apologize this 

morning to everyone here. We tried to find a tax expert, named Michael Cohen, thinking it would generate more attention. We were 

unable to do so. But again, we have an esteemed panel. 

We are here today to talk about the impact of the 2017 tax law 

on the federal budget and American families. It is a conversation 

my Democratic colleagues and I tried to have with our Republican 

counterparts more than a year ago. But instead of collaborating on 

bipartisan, middle class-focused tax reform, and instead of heeding 

the warnings of economists, the Congressional Budget Office and 

even our own constituents, congressional Republicans chose to 

enact massive tax cuts for the wealthy and large corporations, 

which we will discuss today. They did this on their own, behind 


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closed doors, in the dead of night and without time for debate or 

any public scrutiny. And I exclude all my Republican colleagues 

here. I don’t think anyone here was involved in that, in that process. Though most who are here did vote for it. 

That bill was enacted in such a hurry that senators were forced 

to read handwritten changes in the margins of the bill text, if they 

had time to read it at all. It is one of the reasons why there have 

been requests for more than 70 corrections to the tax bill coming 

from Senate Republicans, at least. 

This tax law was based on the flawed notion of trickle-down economics, which has totally been discredited. The idea that tax cuts 

for the wealthiest Americans and for corporations will trickle down 

and raise the standard of living and incomes for everyone else. We 

know that has not happened. 

Under the Republican tax law, nearly all the tax cuts are going 

to the top 1 percent and corporations. The richest 1 percent alone 

are receiving more than 80 percent of the total benefits. Our longterm economic growth trajectory has not improved, the federal deficit is soaring as corporate tax receipts plummet. There is no sign 

of an investment boom. Wage growth for workers remains weak 

and woefully inadequate. Most small business owners have seen 

few, if any benefits. 

Because of changes in this law, factories and jobs are more likely 

to go overseas. There are even more special interest tax loopholes 

for the wealthy than before. And that promise of being able to do 

your taxes on a postcard—well, we are still waiting for that one. 

Since the President signed this bill into law, we have seen a 

record-setting $1 trillion in stock buybacks, buybacks that make 

rich investors richer and fuel rising CEO pay. And, by the way, 

about a third of the benefits of those stock buybacks go to foreign 

investors. They do almost nothing to improve business operations 

or help the average worker. They have not improved our economic 

outlook and, as our witnesses believe, will ultimately worsen income and wealth inequality. And due to perverse international tax 

incentives in the law, it is possible for companies to actually reduce 

their taxes significantly more or avoid paying tax altogether—by 

generating income overseas and moving investments abroad. This 

endangers more than 15 million American workers whose jobs are 

vulnerable to being offshored. 

For American families, this law is a huge and predictable failure. 

For the federal budget, it is a huge and predictable drain. And that 

is because the premise on which this tax legislation was built, that 

it would magically pay for itself, is fundamentally flawed. As we 

will hear today, the GOP tax law has significantly weakened our 

budgetary health. It has caused more than a 30 percent drop in 

corporate receipts in 2018, with total receipts as a share of GDP 

falling to the lowest level since the end of the great recession. This 

is despite healthy economic growth and a tight labor market. 

As we engage in our oversight function, today we will not only 

discuss what the impact of the tax cuts have had on the budget but 

how they will impact the economy and American families going forward. Our budgetary challenges, and we have many, require smart, 

fiscally responsible policies, and the American people are demanding it. 


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Today, we are going to find out just how deep the damage goes. 

We will look at the facts about the tax law’s impact on American 

families. And we will set the stage for taking necessary action to 

move our nation’s fiscal policies in the right direction. I thank our 

witnesses for helping us with this discussion and I look forward to 

hearing from you. 

I now yield five minutes to the ranking member, Mr. Womack. 

[The prepared statement of Chairman Yarmuth follows:] 


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Y armuth Opening Statement 

2017 Tax Law: Impact on the Budget and 

American Families 

February 27, 2019 

Once again, welcome to our witnesses. We are here today to 

talk about the impact of the 201 7 tax law on the federal budget 

and American families. It is a conversation my Democratic 

colleagues and I tried to have with our Republican 

counterparts more than a year ago. 

But instead of collaborating on bipartisan, middle-class 

focused tax reform, and instead of heeding the warnings of 

economists, the Congressional Budget Office, and even our 

own constituents, Congressional Republicans chose to enact 

massive tax cuts for the wealthy and large corporations, which 

we will discuss today. They did this on their own, behind 

closed doors, in the dead of night, and without time for debate 

or any public scrutiny. 

And I exclude all my republican colleagues here. I don't think 

anyone here was involved in that process, although most who 

were here did vote for it. 
5 


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That bill was enacted in such a hurry that Senators were forced 

to read handwritten changes in the margins of the bill text, if 

they had time to read it at all. 

That's one of the reasons why there have been requests for 

more than 70 corrections to the tax bill, coming from Senate 

Republicans, at least. 

This tax law was based on the flawed notion of trickledown 

economics. Which has totally been discredited. The idea that 

tax cuts to the wealthiest Americans and corporations will 

trickle down and raise the standard of living and incomes for 

everyone else. 

We know that hasn't happened. Under the Republican tax law 

nearly all the tax cuts are going to the top 1% and 

corporations. Richest 1% alone are receiving more than 80% 

of the total benefits. 

Our long-term economic growth trajectory has not improved. 

The federal deficit is soaring as corporate tax receipts 

plummet. There is no sign of an investment boom. Wage 

growth for workers remains weak and woefully inadequate. 

Most small business owners have seen few, if any benefits. 
6 


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Because of changes in this law, factories and jobs are more 

likely to go overseas. There are even more special interest tax 

loopholes for the wealthy than before. And that promise of 

being able to do your taxes on a postcard-well, we're still 

waiting for that one. Since the president signed this bill into 

law, we've seen a record setting $1 trillion in stock 

buybacks-buybacks that make rich investors richer and fuel 

rising CEO pay. And by the way, about a third of the benefits 

of those stock buy backs go to foreign investors. They do 

almost nothing to improve business operations or help the 

average worker. They have not improved our economic 

outlook and as our witnesses believe, will ultimately worsen 

income and wealth inequality. 

And due to perverse international tax incentives in the law, it 

is possible for companies to actually reduce their taxes 

significantly more-or avoid paying tax altogether-by 

generating income overseas and moving investments abroad. 

This endangers more than 15 million American workers whose 

jobs are vulnerable to being offshored. 

For American families this law is a huge and predictable 

failure. For the federal budget it's a huge and predictable 

drain. And that is because the premise on which this tax 

legislation was built, that it would magically pay for itself, is 

fundamentally flawed. 
7 


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As we are here today, the GOP tax law has significantly 

weakened our budgetary health. It has caused more than a 

30 percent drop in corporate receipts in 2018, with total 

receipts as a share of GDP falling to the lowest levels since the 

end of the Great Recession. This is despite healthy economic 

growth and a tight labor market. 

As we engage in our oversight function, today we will not only 

discuss what the impact of the tax cuts have had on the budget, 

but how they will impact the economy and American families 

going forward. 

Our budgetary challenges-and we have many-require smart, 

fiscally responsible policies, and the American people are 

demanding it. Today, we are going to find out just how deep 

the damage goes. We will look at the facts about the tax law's 

impact on American families. And we will set the stage for 

taking necessary action to move our nation's fiscal policies in 

the right direction. I thank our witnesses for helping us with 

this discussion and look forward to hearing from you. 
8 

Mr. WOMACK. I thank the chairman for holding this important 

hearing and thank you to our witnesses for being here today. By 

the way, in case you didn’t pick up on it, Chairman Yarmuth is not 

a big fan of the Tax Cuts and Jobs Act. I kind of just wanted to 

state that for the record. 

I would like to extend a warm welcome to Lana Pol, a secondgeneration business owner from Pella, Iowa. Thank you, Ms. Pol, 

for traveling to Washington, D.C., to share your story with us. I 

look forward to your testimony. 

As we will hear from the gentlelady from Iowa, the Tax Cuts and 

Jobs Act is working. It is delivering meaningful relief to workers, 

families, job creators, and communities across the country after 

years of sky-high taxes and a sluggish economy. 

A little more than a year after President Trump signed the Tax 

Cuts and Jobs Act into law, our economy is strong again, with more 

than double the GDP growth seen during the Obama administration, and Americans are feeling the difference every day. Americans are seeing bigger paychecks, getting to keep more of their 

hard-earned money to save, spend and invest the way they see fit. 

Wages and salaries increased by more than 3 percent in 2018, the 

largest percent increase in more than a decade. According to the 

nonpartisan Tax Foundation, 80 percent of wage earners have seen 

an increase in their take-home pay. 

Americans are seeing more jobs. There are 7.3 million job openings, the most job openings since 2000 when the Department of 

Labor first started recording this data. Unemployment fell to the 

lowest level since the 1960s in 2018 at 3.9 percent, and CBO 

projects unemployment will continue to decline to 3.5 percent in 

2019. 

Americans are feeling more optimistic about the future. Consumer confidence is at an 18-year high. And, according to a new 

Gallup Poll released earlier this month, nearly 70 percent believe 

their personal finances will continue to improve next year. 

Job creators in my district are seizing on this opportunity. One 

of my constituents, Rick Barrows, runs Multicraft Contractors, a 

construction and industrial services business with roughly 700 employees. In talking with Rick, it is clear how the Tax Cuts and Jobs 

Act has made a meaningful difference, not only for him and his 

family, but for all of his employees. With lower taxes, Rick was 

able to double the employer contribution to his employees’ 401(k)s. 

He was able to invest in leadership and workforce development. 

And, with the ability to immediately write off the cost of capital investments, Rick was able to dramatically expand his operation, acquiring and renovating an adjacent property, ensuring his business 

can continue to grow. Now, these are the real-world benefits that 

I am hearing from back home. 

Despite these successes, some of my colleagues on the other side 

of the aisle are looking for ways to reverse this progress and increase taxes on hardworking Americans, all so they can pay for 

more expensive government-run programs. As we recently heard 

from the CBO director, Dr. Keith Hall, these efforts are likely to 

have significant negative consequences for our economy and constituents we represent. All of us sitting on this dais today have a 


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9 

responsibility to get our fiscal house in order. And raising taxes 

that will stifle growth and investment is not the answer. 

As I have said before, we do not have a revenue problem—in fact, 

quite the opposite. With the Tax Cuts and Jobs Act, federal revenues in Fiscal Year 2019 are expected to increase by $186 billion. 

What we have is a spending problem, a fact many Democrats are 

choosing to ignore. Today, mandatory spending accounts for about 

70 percent of all federal spending. Without taking into account proposals for massive new trillion-dollar entitlement programs, mandatory spending is expected to increase to 78 percent at the end of 

the 10-year budget window. 

I hope that our discussion today illuminates for my colleagues on 

the other side of the aisle that the Tax Cuts and Jobs Act is helping local business owners, like Ms. Pol, to create more jobs, increase paychecks and create more economic opportunities for families. And to truly address the fiscal challenges facing our nation 

today and future generations, we must tackle the core driver of our 

ballooning debt, and that is out-of-control spending. 

With that, Mr. Chairman, I thank you for the opportunity and 

I yield back my time. 

[The prepared statement of Steve Womack follows:] 


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BUDGET 

HOUSE 

BUDGET 

REPUBLICANS 

Ranking Member Steve Womack (R-AR) Opening Statement 

(As Prepared For Delivery) 

Thank you, Chairman Yarmuth, for holding this important hearing, and thank you to our witnesses 

for being here today. I especially want to extend a warm welcome to Ms. Lana Pol, a 2ndgeneration family business owner from Pella, Iowa. Thank you, Ms. Pol, for traveling to 

Washington, D.C., to share your story with us. 

As we will hear from Ms. Pol today, the Tax Cuts and Jobs Act is working. It is delivering 

meaningful relief to workers, families, job creators, and communities across the country after 

years of sky-high taxes and a sluggish economy. 

A little more than a year after President Trump signed the Tax Cuts and Jobs Act into law, our 

economy is strong again - with more than double the GDP growth seen during the Obama 

Administration- and Americans are feeling the difference every day. 

Americans are seeing bigger paychecks- and getting to keep more of their hard-earned money 

to save, spend and invest the way they see fit. 

Wages and salaries increased by more than 3 percent in 2018 -the largest percent increase in 

more than a decade. According to the nonpartisan Tax Foundation, 80 percent of wage earners 

have seen an increase in their take-home pay. Americans are seeing more jobs. 

There are 7.3 million job openings- the most job openings since 2000, when the Department of 

Labor first started recording this data. Unemployment fell to the lowest level since the 1960s in 

2018 at 3.9 percent, and CBO projects unemployment will continue to decline to 3.5 percent in 

2019. 

Americans are feeling more optimistic about the future. Consumer confidence is at an 18-year 

high, and, according to a new Gallup poll released earlier this month, nearly 70 percent believe 

their personal finances will continue to improve next year. 

Job creators in my district are seizing this opportunity. One of my constituents, Rick Barrows, runs 

Multi-Craft Contractors - a construction and industrial services business with roughly 700 

employees. In talking with Rick, it's clear how the Tax Cuts and Jobs Act has made a meaningful 

difference, not only for him and his family, but for all of his employees. 
11 


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With lower taxes, Rick was able to double the employer contribution to his employee's 401(k)s. 

He was able to invest in leadership and workforce development. And, with the ability to 

immediately write off the cost of capital investments, Rick was able to dramatically expand his 

operation, acquiring and renovating an adjacent property - ensuring his business can continue 

to grow. These are the real-world benefits I'm hearing about back home. 

Despite these successes, some of my colleagues on the other side of the aisle are looking for ways 

to reverse this progress and increase taxes on hardworking Americans- all so that they can pay 

for more expensive, government-run programs. 

As we recently heard from Congressional Budget Office Director, Dr. Keith Hall, these efforts are 

likely to have significant negative consequences for our economy and the constituents we 

represent. All of us sitting on this dais today have a responsibility to get our fiscal house in order 

-and raising taxes that will stifle growth and investment is not the answer. 

As I have said before, we don't have a revenue problem - in fact, quite the opposite. With the 

Tax Cuts and Jobs Act, federal revenues in Fiscal Year 19 are expected to increase by $186 billion. 

What we have is a spending problem- a fact many Democrats are choosing to ignore. Today, 

mandatory spending accounts for 70 percent of all federal spending. 

Without taking into account proposals for massive, new trillion-dollar entitlement programs, 

mandatory spending is expected to increase to 78 percent of all federal spending by 2029. 

I hope that our discussion today illuminates for my colleagues on the other side of the aisle that 

the Tax Cuts and Jobs Act is helping local business owners like Ms. Pol create more jobs, increase 

paychecks and create more economic opportunities for families. 

And, that to truly address the fiscal challenges facing our nation today and future generations, 

we must tackle the core driver of our ballooning debt: out-of-control spending. 

With that, Mr. Chairman, thank you and I yield back. 
12 

Chairman YARMUTH. I thank the gentleman. And in the interests 

of time, if any other members have opening statements, you may 

submit those statements in writing for the record. 

[The information follows:] 


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FOREIGN AFFAIRS 

, __ DEMOCRATIC CAUCUS 

CONGRESSWOMAN SHEILA JACKSON LEE OF TEXAS 

COMMITIEE ON THE BUDGET 

HEARING: 

IMPACT OF 2017 GOP TAX LAW ON THE BUDGET AND 

AMERICAN FAMILIES 

FEBRUARY 27, 2019 

10:00A.M. 

210CANNON 

~~;£- • Thank you Chairman Yarmuth for convening this important hearing to 

review and assess the negative impacts of the 2017 GOP TaxScam and 

discuss ideal revenue and budgetary policies that should be pursued going 

forward. 

• Let me also welcome our witness and thank them for the helpful testimony: 

1. Professor Caroline Bruckner, Kogod School of Business, American 

University 

2. William G. Gale, Chair in Federal Economic Policy, Brookings; CoDirector, Urban-Brookings Tax Policy Center 

3· Chye-Ching Huang, Director of Federal Fiscal Policy, Center on Budget 

and Policy Priorities 

4. Lana Pol, President of Geetings Inc., G.I. Warehouse Corp., Mowbility 

Sales & Service LLC, and Creative Inspirations LLC 

-1-
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• Mr. Chairman, the GOP TaxScam was the wrong policy at the wrong time 

because it showered benefits on the top 1% and large multinational 

corporations while doing little for everyday working Americans and Main 

Street small business owners. 

• GOP TaxScam also raises the nation's debt by $1.9 trillion at a time when the 

economy was already strong, and when we are facing major long-term 

budgetary challenges driven by our aging population. 

• And rather than devoting resources to wise investments in our workers and 

small businesses, the GOP TaxScam further burdens working families, 

endangers Americans' retirement security, and worsens our budgetary 

outlook. 

• Mr. Chairman, the verdict is in and none of GOP TaxScam's promises have 

borne out. 

• Our long-term economic growth trajectory is unchanged and there is no sign 

of an investment boom. 

• Real wage growth for workers remains modest and factories and jobs are 

more likely to go overseas. 

• The federal deficit is soaring as corporate tax receipts plummet and the tax 

code is riddled with even more special-interest tax breaks and loopholes. 

THE GOP TAXSCAM LED To A RECORD-SEITING $1 TRILLION IN STOCK 

BUYBACKS. 

• The GOP TaxScam delivered huge benefits to rich investors and CEOs 

through record-setting stock buybacks in 2018 while average workers 

struggle to pay for rising health care and living costs. 

• Stock buybacks do nothing to improve business operations or help workers. 

THE GOP TAXSCAM SHOWERS BENEFITS ON THE WEALTIIY AND LARGE 

CORPORATIONS WHILE DOING LIITLE FOR WORKERS AND MAIN STREET 

SMALL BUSINESSES. 

2-
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• The GOP tax cut is heavily tilted toward the wealthy and corporations and 

exacerbates the stagnation of wages for the vast majority of workers and 

worsens income and wealth inequality. 

• The GOP tax law does nothing to help small businesses gain access to capital 

and grow their receipts. 

• Only 5 percent of small businesses pay taxes at the corporate level and most 

of the pass-through tax cuts go to the largest 2.6 percent of businesses. 

THE GOP TAX LAW ENCOURAGES COMPANIES TO SEND FACTORIES AND JOBS 

OVERSEAS: 

• Under the GOP tax law, income generated by American companies abroad 

face tax rates that are half the new top corporate rate of 21 percent. 

• Some companies may be able to avoid tax altogether on tangible investments 

made offshore. 

• This further incentivizes companies to move tangible assets, such as 

factories and machinery, overseas. 

• Rather than protecting workers and their families, the GOP tax law tilts the 

playing field against American workers. 

THE GOP TAX LAW INCREASES DEFICITS BY $1.9 TRILLION WHEN WE ARE 

FACING MAJOR BUDGETARY CHALLENGES DRIVEN BY OUR AGING 

POPULATION. 

• Even after accounting for any economic growth effects, the Congressional 

Budget Office (CBO) estimates the GOP tax scam increases deficits by $1.9 

trillion over the ten years 2018 to 2028 - hardly the "pay for itself' message 

we heard from the Administration and Republicans in Congress. 

• Yet the nation is facing long-term fiscal challenges that require more 

revenues to finance critical national needs. 

• Projected spending increases over the next few decades are largely driven by 

our aging population. 

• We need fair, progressive, and fiscally responsible revenue and budgetary 

policies. 

-3-
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• We need to make wise long-term investments in our workers and Main 

Street small businesses. 

• We also need fiscally responsible tax and budgetary polices that return us to 

a sustainable fiscal trajectory. 

• The GOP tax law does exactly the opposite by driving revenues to historically 

low levels and endangering Americans' retirement security and access to 

health care. 

• Our friends across the aisle continue to claim that the GOP TaxScam 

significantly boosted economic growth, spurred an investment boom, drove 

unemployment down to the lowest level since the 1960s, created jobs for 

millions of workers, and helped middle-class families keep more of their 

paychecks. 

• These claims collapse in the crucible of actual experience. 

THE GOP TAXSCAM DID NOT SIGNIFICANTLY BOOSTS THE ECONOMY. 

• While the law spurred a temporary 3.1 percent increase in real GDP last 

year, CBO expects growth to slow to 2.3 percent this year and 1.7 percent 

next year. 

• By 2023, the tax law's positive effect on economic growth will fade away 

entirely. 

THE GOP TAXSCAM DOES NOT SPUR BUSINESS INVESTMENT. 

• There is no evidence of an investment boom, which Republicans promised 

would be the key to unleashing unprecedented economic growth and wage 

gains. 

• Nonresidential business investment grew by less than 1 percent in the third 

quarter of last year, while business' orders for durable goods (another 

measure of investment) fell in December for the fourth time in five months. 

• Instead of encouraging investment, the tax cut triggered a record level of 

stock buybacks. 

GOP TAXSCAM NOT CAUSE OF LoWEST UNEMPLOYMENT SINCE 1968. 

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• President Trump is coasting on an economic expansion - now the secondlongest on record - that began under President Obama. 

• The law has not changed the unemployment trend. 

• The unemployment rate has fallen steadily since the end of the Great 

Recession. 

THEGOPTAXSCAMIIAsNOTCREATEDJOBSFORMILLIONSOFWORKERS. 

• More jobs were created in President Obama's last two years in office than 

President Trump's first two years. 

• The law has not changed job creation trends. 

• The tax law also encourages companies to send factories and jobs overseas 

rather than protecting jobs at home. 

THE GOP TAXSCAM IS NOT HELPING MIDDLE-CLASS FAMILIES KEEP MORE 

OF THEIR PAYCHECKS. 

• There has been very little increase in private sector compensation or wages 

since the tax law passed. 

• Real wage growth continues to be disappointingly modest, and real bonuses 

increased by just 2 cents per hour between December 2017 and September 

2018. 

• The law ignores the stagnation of working-class wages and worsens income 

and wealth inequality. 

• In fact, only 35 percent of the tax law's benefits in 2018 will go to the bottom 

So percent of households making less than approximately $150,000 per 

year. 

EVEN THOUGH FEDERAL REvENUES HAVE RISEN, THE GOP TAXSCAM HAs 

CREATED A MAJOR REvENuE DEFICIENCY PROBLEM. 

• Corporate tax receipts dropped an astounding 31 percent drop in 2018, with 

total receipts as a share of GDP falling to the lowest levels since the end of 

the Great Recession despite healthy economic growth and a tight labor 

market. 

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• Revenue last year was 16-4 percent of the economy, almost two percentage 

points below the so-year average of 18.3 percent in years in which 

unemployment fell below 5 percent. 

• By contrast, spending as a share of GDP last year fell right at the historical 

average. 

• Major drivers of rising spending are primarily the result of demographics. 

• To put it simply, Congress must make wise decisions to manage our 

budgetary challenges, not give deficit-financed tax cuts to the wealthy and 

attack Social Security, Medicare, and other crucial programs working 

Americans rely on. 

• Thank you, I yield back my time. 

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Rep Chip Roy I February 27, 2019 

House Budget Committee 

Opening Statement Regarding a successful TX-21 business- McCoy's: 

"I am excited to begin my time in this hearing today highlighting a real life, real 

America business success story. Not something from an economic model or a 

think-tank, but something from San Marcos, Texas. 

McCoy's Building Supply is a family-run company for four generations, 

employing over 2500 individuals in five states. When speaking with the company 

earlier in the week, something that stood out was the direct impact of the booming 

economy on their business success. As a spokesperson noted, 'we don't live in a 

theoretical, academic bubble. We are convinced that changes to the tax law 

increased our sales in what we call the McCoy States of America'. Because of 

economic growth, the company had revenues that allowed it to invest in updating 

its facilities and improving its services for its customers -the what they call Alpha 

to Omega of residential and multi-family builders, remodelers, and contractors. 

Increased revenues for Americans, not the government -that is what we should be 

about in Washington. And with that, I want to thank Ms. Pol for being here today 

and use the remainder of my time to do a little data-point checking with the rest of 

y'all." 
20 

Chairman YARMUTH. Now we will begin our testimony from the 

witnesses. 

I first yield five minutes to Dr. Gale. 

STATEMENTS OF WILLIAM G. GALE, Ph.D., ARJAY AND 

FRANCES FEARING MILLER CHAIR IN FEDERAL ECONOMIC 

POLICY, BROOKINGS INSTITUTION, CO-DIRECTOR OF TAX 

POLICY CENTER; CHYE-CHING HUANG, DIRECTOR OF FEDERAL FISCAL POLICY, CENTER ON BUDGET AND POLICY 

PRIORITIES; CAROLINE BRUCKNER, EXECUTIVE IN RESIDENCE, DEPARTMENT OF ACCOUNTING AND TAXATION, 

AMERICAN UNIVERSITY; AND LANA POL, PRESIDENT, 

GEETINGS, INC. 

STATEMENT OF WILLIAM G. GALE 

Mr. GALE. Chairman Yarmuth, Ranking Member Womack, members of the committee, thank you for inviting me to testify this 

morning. As was mentioned, I am affiliated with the Brookings Institution and the Tax Policy Center. My statements today represent 

my own views, not those of any institution. 

The 2017 tax cut was the biggest overhaul since 1986. It definitely made some needed changes to the tax system. But my overall assessment, based on my own research and that of others, is 

that, on the whole, the tax cut was the wrong thing at the wrong 

time. Why was it the wrong thing? Good policy generally meets 

three tests. First is a growth test, it makes the economy stronger. 

Second is a fairness test, it makes the economy more fair. And 

third is a fiscal test, it is fiscally sustainable. TCJA does not pass 

any of those tests and it clearly fails two of them. 

Let’s start with the growth effect. That is the one that it does 

not pass. The Congressional Budget Office has indicated that national income after 10 years will go up by 0.1 percent because of 

the tax cut. That is a gross income number. If you looked at net 

income, it would actually be zero or lower. So it clearly does not 

pass the growth test. 

Let’s look at the fairness test. The tax cut increases disparities 

in after-tax income. It gives the largest absolute and relative tax 

cuts to high-income households. So on that ground alone, it fails 

the fairness test. But it is actually worse than that. If you consider 

that the tax cut has to be financed in some way, Representative 

Womack mentioned the long-term fiscal issue, if you consider that 

the tax cut has to be financed some way and you consider reasonable ways to finance the tax cut, you will find that most households 

will actually be worse off with the tax cut plus the financing than 

they would have been without the tax cut. So, it fails the fiscal 

test—I’m sorry, it fails the fairness test. 

The third test is the fiscal test and the tax cut clearly makes the 

government’s already difficult long-term fiscal status even worse. I 

do not want to waste your time and I do not want to insult anyone’s intelligence. But it is important to state the tax cut did not 

pay for itself, it will not pay for itself. You can look at the analysis 

of any reputable organization, including the CBO, including the 

Tax Policy Center, including the Tax Foundation and you will find 

that that is the case. So it fails the fiscal test as well. 


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All right. The combination of not passing the growth test and 

failing the fairness test and failing the fiscal test means that what 

the tax cut will actually do is give more money to current generations of high-income households. And that will come at the expense 

of low- and middle-income households and of members of future 

generations. At the very least, I think we could agree that is not 

a model for what good public policy ought to do. 

There are other issues as well that make TCJA the wrong thing. 

It made tax policy more complicated, it increased uncertainty, it 

will reduce health insurance coverage, it will raise the cost of 

health insurance, it will likely reduce contributions to charitable 

causes. Again, these are not hallmarks of good public policy. 

So those are the reasons why I think it was the wrong thing. 

Why was it at the wrong time? Well, it was enacted at a time when 

the economy was already going strong. We had been expanding for 

eight years at that point, unemployment was low. It was a prime 

time to deal with the fiscal situation. As President Kennedy said, 

the time to fix the roof is when the sun is shining. We had an opportune chance to address the fiscal situation while the economy 

was strong and instead, we squandered that, making the deficit 

larger and giving tax cuts to high-income households. 

You should also be aware that the 2017 tax cut will make it 

harder for policymakers to fight future recessions. It reduces the 

ability of the tax system to cushion the effects of the recession. It 

reduces the automatic stabilizer function of the tax system. 

In terms of what you should do in response to these issues, I will 

just touch on three issues. One is to fix the issues in TCJA. A second is to give the IRS more resources to be able to do its job. And 

a third is to start thinking about longer-term revenue needs. Even 

if we do make judicious cuts in spending, the laws of arithmetic 

dictate that we will need to raise revenues and a value-added tax 

and particularly a carbon tax are the best options in that regard. 

I thank you very much for inviting me and I look forward to talking about all of these issues. 

[The prepared statement of William G. Gale follows:] 


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The 2017 Tax Law: Impact on the Budget and American Families 

Testimony Submitted to 

U.S. House of Representatives 

Committee on the Budget 

February 27,2019 

William G. Gale 1 

Brookings Institution 

Tax Policy Center 

Chairman Yarmuth, Ranking Member Womack, and Members ofthe Committee: 

Thank you for inviting me to testifY this morning on the 2017 tax law (Public Law 115-

97), commonly known as the "Tax Cuts and Jobs Act" (TCJA). The law represents the biggest 

tax overhaul since 1986. It has had, and will continue to have, important effects on the economy. 

My testimony, based on my own research and that of others, focuses on several key 

conclusions. Although it improved the tax code in some ways, TCJA (a) will have minimal 

impact on long-term growth; (b) increases disparities in after-tax income by giving the largest 

relative and absolute tax cuts to high-income households; (c) will make most households worse 

off after taking into account plausible ways of financing the tax cut; (d) makes the government's 

troublesome long-term fiscal status even worse; (e) makes the tax system more complex and 

more uncertain; (f) will make it harder for policymakers to fight future recessions; and (g) will 

reduce health insurance coverage, raise health insurance prices, and reduce charitable giving. 

In combination, the law's small growth impact, regressive distributional effect, and 

negative fiscal impact imply that TCJA made the current generation of high-income households 

better off at the expense oflower-income households and future generations. 

For all these reasons, policymakers should revisit the tax law and address the problems 

associated with it, as well as tum to longer-run considerations in tax policy. 

The remainder of this testimony elaborates on these conclusions and related points. I also 

attach several articles that I have written that document these points in more detail. 

• TCJA will have minimal effects on long-term growth. 

1 Aljay and Frances Fearing Miller Chair, The Brookings Institution, and Co-Director, UrbanBrookings Tax Policy Center. The views presented are my own and should not be taken to 

represent the views of the Brookings Institution or the Urban-Brookings Tax Policy Center. 

1 
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Tax cuts may raise long-term growth by improving incentives to work, save, and invest, 

but the deficits they create will offset some or all of those gains. Most studies indicate that the 

long-term impact ofTCJA on Gross Domestic Product (GDP) the output produced in the 

United States will be modest. The impact on Gross National Product (GNP) the income that 

Americans receive will be even smaller. Because the TCJA will encourage foreigners to invest 

in the United States, the returns they receive will reduce the share of income that Americans will 

keep from their production. For example, the Congressional Budget OtTice (CBO) estimated that 

TCJA will raise GDP by 0.5 percent by 2028, but about 80 percent of that increase will accrue to 

foreigners, leaving only an increase ofO.I percent in national income (GNP). Once depreciation 

is taken into account, the remaining value- net national product - is essentially unchanged. As a 

result, CBO estimates imply that Americans will receive no increase in net income in 2028 from 

TCJA as written. 

• TCJA may have stimulated the economy over its first year, but other factors also 

clearly played an important role in recent economic performance. 

Almost any tax cut will boost the economy in the short run because higher after-tax 

incomes increase spending and investment and, thus, overall demand for US goods and services. 

But any boost to the economy in the short-run tells us little about the long-term effects. Indeed, 

the same economic models that predict that TCJA would have minimal long-term effects on 

growth also predict that it would have positive short-term effects. The long-term effects depend 

on supply-side factors, not the demand-side effects that boost short-term growth. The TCJA 

could spur saving and investment by increasing after-tax rates of return, but the rise in deficits 

created by TCJA (see below) will eventually raise the cost of capital for US businesses dampen 

or eliminate those supply-side effects. 

And it is important to recognize the role of other factors in current economic 

performance. First, the economy had been growing for eight straight years before TCJA was 

enacted, and it was expected to continue to grow steadily even in the absence ofTCJA. Second, 

a significant amount of the economy's recent uptick can be attributed to the higher government 

spending that was enacted as part of the 2018 budget deal and to recent rises in oil prices. (The 

U.S. used to a net importer of oil, which caused oil price increases to hurt the economy. Now, 

though, due primarily to "fracking," the U.S. has become a major exporter of oil and gas, so that 

higher prices encourage U.S. investment through increased rig construction and drilling activity.) 

Thus, it is not evident that TCJA has had big effects in the short-term and, even if it did, 

that result is not indicative of the long-tenn results. 

• TCJA is providing disproportionately large benefits to high-income households. 

TCJA gave most of its benefits to the wealthy and thus increased the inequality of 

income, which had already been growing for the past four decades. Tax Policy Center 

(TPC) estimates show that TCJA increased after-tax income in 2018 by 0.4 percent for 

households in the lowest quintile, compared with 2. 9 percent for those in the top quintile, and 

even more for the top few percent of households. 

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• Taking into account plausible methods of fmancing the tax cut, most households will 

end up worse off under TCJA than ifit had not been enacted. 

About 80 percent of taxpayers received a direct tax cut from TCJA, but that is not the end 

of the story. Tax cuts eventually have to be paid for. When President Trump said he was giving 

Americans a tax cut for Christmas, for example, he neglected to add that they (or their children) 

eventually would receive the bill. It is unclear how TCJA will eventually be financed, but in the 

most likely scenarios - where tax increases or spending cuts are imposed very broadly - for 

example, on an equal-per-household basis or and equal-share-of-income basis - most households 

will end up worse off than had the TCJA never passed. 

• TCJA makes a troublesome federal fiscal situation even worse. 

At the risk of stating the obvious, TCJA reduces revenues. It does not pay for itself. It 

does not come close to paying for itself. Revenues fell ]2y 0.8 percent in 2018, even though the 

economy was growing. Corporate revenues plummeted. 

The CBO estimates that TCJA will increase deficits by almost $1.9 trillion through 2028, 

even after incorporating the positive impact of the new law on the economy. Iflawmakers make 

the temporary provisions ofTCJA permanent, the long-term effects will be even more dire. 

The Congressional Budget Ottice and mv own research with Alan Auerbach and Aaron 

Krupkin show that the nation was poised for persistent and rising federal budget deficits and 

government debt even before TCJA was enacted. TCJA exacerbated this problem. 

• The combination of the minimal growth impact, the regressive distributional 

impact, and the negative fiscal impact, all described above, imply that TCJA will 

redistribute resources to current high-income households at the expense of current 

lower-income households and future generations. 

• Although the tax law simplified taxes in some ways, it also made the tax system 

more complex in significant ways and created significant uncertainty surrounding 

tax policy. 

The chief sources of increased complexity are the pass-through provisions (section 199A) 

and the rules regarding international transactions and income (GIL TI, BEAT, and FDII). The 

pass-through provisions are notoriously complex and often seem arbitrary in how they define 

qualifYing businesses. The international rules are enormously complex and create unintended 

interactions, which cause effective tax rates to vary widely across investments. 

The increased complexity has boosted employment significantly at law and accounting firms 

that provide tax advice. 

Some of the uncertainty and complexity arises because the legislation was poorly drafted. 

These complexities are due in part to the rushed manner in which Republican majorities pushed 

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TCJA through the Congress. The combination of new, complicated tax changes and a rushed 

legislative calendar is a predictable recipe for disaster. 

TCJA raised uncertainty in several ways. First, the interpretation of many of the rulesparticularly for international taxation - is still not clear. Second, almost all the individual income 

tax provisions expire by the end of2025, even though TCJA advocates insist that they will be 

extended. Other nonstandard items - such as the phase-in of amortization for R&D and 

increases in the so-called GIL TI tax -raise questions as to whether they will be enacted. All 

these factors suggest that revisiting the law in the near future would be timely. 

• The 2017 tax law will make it harder for policymakers to fight recessions. 

The U.S. tax system generally works to help stabilize the economy. Tax revenues tend to 

rise and fall by more than income does, serving as an automatic stabilizer that buffers recessions 

and moderates booms. The 2017 tax law reduces the ability ofthe tax system to serve as an 

automatic stabilizer. The chief culprits are reductions in marginal personal and corporate income 

tax rates, changes to rules regarding net operating losses, and changes to deductions for 

depreciation and interest. The cyclical properties ofFDII will exacerbate these problems. 

Congress passed the TCJA at a time when the United States had recovered from the Great 

Recession. Tax cuts are most useful when they stimulate the economy during times of recession. 

At a time of full employment and strong corporate profits, however, Congress should have 

increased taxes to address the long-term fiscal shortfall, not cut them. 

• The 2017 tax law will raise the cost of health insurance and reduce coverage and will 

likely reduce charitable contributions. 

By eliminating the tax on people who do not buy adequate health insurance, TCJA will 

reduce health insurance coverage and raise health insurance premiums. This happens because, 

without a penalty, healthy people are most likely to forgo health insurance, knowing that ACA 

guarantees access to insurance in the future if their health status deteriorates. The law's 

reductions in alcohol excise taxes, if they are passed through to consumers, will raise alcoholrelated deaths and other costs. 

The sharp reduction in the number of households who will be able to itemize deductions 

on their income tax will likely reduce charitable contributions, as will the reduction in the top 

individual and corporate tax rates. 

• It is time to revisit and reform the 2017 tax law and move on to additional matters 

in tax revenues. 

The section 199A provisions are clearly inequitable, complex, regressive, and arbitrary. 

By taxing certain forms of business income lower than other forms of business income and by 

taxing business income at lower rates than wage income, the rules create all sorts of wasteful 

incentives for tax sheltering. These provisions should be repealed (or let to expire). 

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This can and should be considered jointly with efforts to broaden the tax base and raise 

rates for high-income households, including taxing capital gains at death (or providing a carry 

over basis regime). 

The international rules' complexity and unintended effects calls for a revisiting and 

revamping of the law. 

The sheer regressivity of the estate tax changes calls for reconsideration of those changes 

as well as consideration to move to an inheritance tax, to tax capital gains at death and/or 

consider some form of wealth taxation. 

There is no substitute for giving the IRS the additional resources, people, tools, and legal 

changes that it needs to help track down at least some of the more than $500 billion tax gap the 

country faces today. These are taxes that are owed but not paid. We have good data on where 

the evasion takes place - capital income in general and sole proprietorship income in particular, 

and various studies show that each dollar of spending on enforcement can raise $3-$4 or more in 

revenues, yet the IRS budget is tiny, its work force is shrinking, and audit rates are down. This 

situation needs to be corrected immediately and permanently. 

Looking to longer-term revenue needs, the nation will clearly need more revenue in the 

future to address rising health care and social security costs, rising net interest costs, and the debt 

(even if judicious cuts to non-interest spending are made). The obvious candidates here would 

be to let the TCJA rate cuts and brackets expire, to enact a value-added-tax (on the order of 10 

percent, with offsets for low-income household) or to enact a significant carbon tax (starting at 

$30-$40 per ton, rising with inflation, and with offsets for low-income households.). 

Thank you again for inviting me. I look forward to addressing these issues with you. 

5 
27 

Chairman YARMUTH. Thank you very much for your testimony. 

I just want to remind the panelists that all of your written statements have been submitted and received by the committee. They 

will be part of the formal record of the committee, so you don’t 

have to worry about that. 

And I now yield five minutes to Ms. Huang. 

STATEMENT OF CHYE-CHING HUANG 

Ms. HUANG. Chairman Yarmuth, Ranking Member Womack and 

distinguished members of the committee, thank you for the opportunity to testify today about how the 2017 tax law largely left behind low and moderate income Americans and, in many ways, even 

hurts them. 

Since 1979, the real incomes of working-class Americans, that is 

the racially and geographically diverse set of people often defined 

as workers without a college degree, have been virtually stagnant. 

The lowest income 60 percent of Americans saw their share of the 

nation’s household income fall while those at the top saw their 

share gain by roughly the same amount. 

The 2017 tax law could have focused on helping those facing the 

steepest challenges in this economy but it largely left them behind. 

And here is a prime example. The law increased the maximum 

child tax credit from $1,000 to $2,000 per child. But it denied that 

full increase to millions of children in low-income working families. 

Eleven million children in the lowest income working families got 

either no increase in the credit or a token increase of just $1 to 

$75. Another 15 million children got an increase of more than $75 

but much less—but less often much less than the full $1,000 per 

child increase. 

Another example is the law’s failure to expand the earned income 

tax credit, a provision that encourages work, lifts the living standards of millions of working families and helps children do better. 

And here are six ways that the law may, in fact, hurt many low 

and moderate-income households. First, it puts workers’ wages and 

workplace standards at risk through its 20 percent deduction for 

passthroughs. That is an incentive for firms to buy workers’ services without employing them directly, such as through hiring them 

as independent contractors or through another firm. And workers 

hired in some of these ways tend to be paid less than when workers are employed directly. 

Second, it retains and even creates new incentives to shift profits 

and investments offshore, risking workers’ wages here in the U.S. 

Third, the law will leave millions more people uninsured or facing higher premiums because it repealed the Affordable Care Act’s 

requirement that most people enroll in health insurance or pay a 

penalty. 

Fourth, it erodes the value of earned income tax credit. The law 

uses a slower measure of inflation to adjust tax brackets and other 

provisions each year. For working families, that means that the 

earned income tax credit grows more slowly over time. And by 

2027, a family that has two children, earning $40,000 will see their 

federal earned income tax credit shrink by roughly $300. 


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Fifth, it ended the child tax credit for 1 million children who are 

overwhelmingly dreamers who were brought to the U.S. by their 

immigrant parents. 

And sixth, it adds $1.9 trillion to deficits over 10 years. That 

raises the pressure on policymakers down the road to squeeze or 

cut critical economic security programs and investments that have 

widely shared benefits. 

Overall, in 2025, households in the bottom 60 percent will receive 

average tax cuts worth 1 percent of their after-tax income. But that 

pales in comparison to the top 1 percent’s tax cuts worth 3 percent 

of their much larger incomes, or about 60,000 each per year on average. 

That skew of the tax law increases racial inequalities. Decades 

of policy choices have set up barriers for households of color so they 

are overrepresented at the bottom of the income distribution, while 

white households are overrepresented at the top. That means that 

white households in the top 1 percent get tax cuts worth more than 

the tax cuts for the bottom 60 percent of households of all races 

combined, ITEP and Prosperity Now estimate. 

Other winners are the tax advisers and lobbyists who are calling 

this law a bonanza. 

Looking ahead, policymakers consider new course and pursue 

true tax reform that in fact prioritizes people with low or modest 

incomes, raises revenue to meet national needs and strengthens 

the integrity of the tax code. 

Thank you, and I look forward to addressing your questions. 

[The prepared statement of Chye-Ching Huang follows:] 


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I'd: 202~-.tOR-10$0 

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Fundamentally Flawed 2017 Tax Law Largely Leaves 

Low- and Moderate-Income Americans Behind 

Testimony of Chye-Ching Huang, Director of Federal Fiscal Policy, 

Before the House Budget Committee 

Chairman Yarmuth, Ranking Member Womack, and distinguished members of the Committee, 

thank you for the opportnnity to testify. I will first outline the fundamental flaws of the 2017 tax 

law: 1 1) it ignores the stagnation of working-class wages and exacerbates inequality; 2) it weakens 

revenues when the nation needs to raise more; and 3) it encourages rampant tax avoidance and 

gaming that will undermine the integrity of tax code. I will then explain in more detail how the 2017 

tax law largely left behind low- and moderate-income Americans- and in many ways hurts them. 

Finally, I explain how a restmcturing of the law can fix these flaws. 

The 2017 Tax Law's Three Fundamental Flaws Mean It Requires 

Fundamental Restructuring 

1. It ignores the stagnation of working-class wages and exacerbates inequality. 

Instead of focusing on the challenges of low- and moderate-income people, the 2017 tax law will 

boost the after-tax incomes of households in the top I percent by 2.9 percent by 2025, roughly three 

times the 1.0 percent gain for households in the bottom 60 percent, the Tax Policy Center (fPC) 

estimates.' The tax cuts that year will average $61,100 for top 1 percent- and $252,300 for the top 

one--tenth of 1 percent. (See Figure 1.) lhe top 1 percent will already have after-tax incomes 

averaging $2.1 million that year, while the average incomes of the bottom 60 percent will be just 

$41,800.' 

1 The law's official name is ";\ct to provide for reconciliation pursuant to titles II andY of the concurrent resolution on 

the budget for "It was tttlcd the "Tax Cuts and Jobs ,\ct" but that name was stncken from the 

bill. This report: Chuck 0.Iarr, Brendan Huang, 

Basic Re;itm•:tming. 

7 TPC Table T17 -0314. 2025 is when the law \\rill be fully phased in and is before many provisions in it are scheduled to 

expire. "Ibc distribution ts roughly similar in Tax Policy Center tables for 2018. The law is even more tilted to the top in 

2027, when most of the indtvtdual prm'1sions expire. 

1 TPC estimates that in 2025, the top 1 percent \v-iH have after~tax incomes exceeding $837,800, and the bottom 60°/o \\'ill 

have incomes below $91,700. 
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New Tax Law Delivers Large Tax Cuts to 

Most Well-Off 

2025 

Income group Percent change in after-tax income Average tax change 

Lowest fifth -$70 

Second fifth 0.9% -$390 

Middle fifth 1.3% -$910 

Fourth fifth 1.4% -$1,680 

Top fifth 2.3% -$7,460 

Top 1 percent 2.9% -$61,090 

Top 0.1 percent 2.7"/o -$252,300 

The tax law's tilt to the most well-off exacerbates racial inequities. Decades of policy choices put 

barriers to econoruic success in front of households of color, resulting in those households being 

overrepresented on the bottom rungs of the income ladder, while white households are 

overrepresented at the top. White faruilies are three times more likely than Latino and Black faruilies 

to be among the highest-income 1 percent of households. So, while the highest-income white 

households make up just 0.8 percent of all households, they receive 23.7 percent of the total tax cuts 

from the 2017 tax law, far more than the 13.8 percent that the bottom 60 pemnt of households of all 

races receives, the Institute for Taxation and Econoruic Policy estimates.4 

The law's tilt to the top reflects several large provisions that primarily benefit the most well-off: 

• Cutting corporate taxes. The 2017 tax law cuts the corporate tax rate from 35 to 21 percent 

and shifts toward a territorial tax system, in which multinational corporations' foreign profits 

largely no longer face U.S. tax. These tax cuts overwhelruingly benefit wealthy shareholders 

and highly paid executives. One-third of the benefits from cutting corporate rates ultimately 

1 Roderick Taylor, "ITEP-Prosperity Now: 2017 Tax Law Gives \'V'hite Households 

Bottom 60~"," CBPP, October 11, 2018, lll!~WI:IDW2pj:h.illg:L!lli2)WJ"Jlccllli~Qlll):..llilli~L.lilliJill:q:!E:=blli'= 

2 
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flow to the top 1 percent, TPC estimates - assuming that the cost of those tax cuts are 

ultimately paid for, but without incorporating estimates of who ends up paying. 5 

• A 20 percent deduction for pass-through income. The law effectively cuts the marginal 

individual tax rate on pass-through income (income from businesses such as partnerships, S 

corporations, and sole proprietorships that business owners claim on their individual tax 

returns) by one-fifth. Tbe top 1 percent of households will get 61 percent of this tax cut on 

pass-through income in 2024, while the bottom two-thirds of households will see just 4 

percent, according to JCT." 

• Doubling the estate tax exemption. The law doubles the amount that the wealthiest 

households can pass on tax-free to their heirs, from $11 million per couple to $22 million, or 

many times the lifetime earnings of a typical high school graduate. The few estates large 

enough to remain taxable- fewer than 1 in 1,000 estates nationwide- will receive a tax cut 

of $4.4 million per couple. 

• Cutting individual income tax rates for those at the top. The law cuts the top individual 

income tax rate from 39.6 percent to 37 percent for married couples with over $600,000 in 

taxable income. By itself, this will give a couple with $2 million in taxable income a $36,400 

tax cut. The law also weakens the Alternative Minimum Tax, which is designed to ensure that 

higher-income people who take large amounts of deductions and other tax breaks pay at least 

a minimum level of tax. The law raises both the amount of income that's exempt from the 

AMT and the income level above which this exemption begins phasing out, delivering 

another tax cut to affluent households. 

History, empirical evidence, and how real wages have fared since December 2017 are all reasons 

to doubt any claims that the large, immediate tax cuts for high-income filers benefit will eventually 

trickle down to low- and moderate-income households.' Instead, the economic circumstances of 

low- and moderate-income people were largely an afterthought in the law, and the law contains 

many provisions that will harm many such households. I will return to this issue after briefly 

outlining the tax law's two other major flaws. 

2. It weakens revenues at a time when the nation needs to raise more. 

The new tax law will cost $1.9 trillion over the next decade,.JCT estimates. These large revenue 

losses are irresponsible given the fiscal challenges the nation will face over the next several decades. 

These challenges include the retirement of the baby boomers, health care costs that likely will 

continue to rise faster than the economy, interest rates returning to more normal levels, potential 

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national security threats, and current and emerging domestic challenges such as large infrastructure 

needs that cannot be indefinitely deferred. 

Because of these pressures, CBPP and other analysts project that spending will need to rise as a 

percentage of gross domestic product (GDP), with most of the spending growth concentrated in a 

few programs- Social Security, Medicare, and Medicaid- that have widespread public support 

and whose growth is traceable to demographic and health care cost factors, not to more generous 

coverage or benefits. 8 But the tax law went in the opposite direction, reducing revenues to a share of 

GOP to its lowest level in the last 50 years outside of the immediate aftermath of a recession.' 

3. It encourages rampant tax gaming and risks undermining the integrity oftax code. 

True tax reform simplifies the tax code and narrows the gaps between how different types of 

income are taxed. The 2017 tax law does the opposite, adding complexity to the tax code and 

introducing new, arbitrary distinctions between different kinds of income. This means that the law 

has created lucrative new opportunities for the well-advised to try to game the tax code to avoid 

taxes - including by lobbying to keep the regulations to implement the hastily enacted law as 

favorable for them as possible. Tax advisors and lobbyists are referring to the law as a "bonama" 

and a "giant present to the tax lobbying community."'" 

The creation and widespread abuse of tax shelters could cause the bill to lose even more revenue 

than current estimates of the law now show- and is likely to increase income inequality even more, 

since tax avoidance is worth the most to wealthy individuals and profitable corporations, who also 

are best equipped to take advantage of those opportunities. 

Examples of potential sheltering opportunities created by the 2017 tax law include: 

• The law's 20 percent deduction for "pass-through" income. The deduction effectively 

means that certain pass-through income will face a lower tax rate than wages and salaries, 

creating an incentive for high-income individuals to reclassify their salaries as pass-through 

income. While the law has complex "guardrails" to try to prevent such abuse, they are poorly 

designed, and invite gaming by tax advisors. For reasons such as this, NYU law professor 

Daniel Shaviro's has aptly described the pass-through provision as "the worst provision ever 

even to be seriously proposed in the history of the federal income tax."'' 

w Theodoric i\feycr, ('It's a giant present to the tax lobbying community: K street lobbyists are banking on years of 

from the tax overhaul," Po/itko,January 2, 2018, http~:/ /\\'\Y\v.politico.com/sroni'"~Of8/(J1/Q2/tax o\·crhaul11 Daniel Shaviro, "Apparently income isn't just income any more," Start 1\Iaking Sense, December 16, 2017, 

http:// drutsh'tdro.l)l()vspot com 12~Jl""' 11 "'~ /apparentlr~income .. i,nt .ius!··innHnc 'Jm-.hrml 

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The final regulations implementing the deduction have been shaped by heavy industry 

lobbying.12 And the provision presents a boon for tax advisors, with one financial advisor 

telling a conference of such advisors: 13 

This is, without a doubt, one of the biggest areas of planning that we can have under the 

new law. This is why, in large part, they should have just renamed the [2017 tax law) the 

tax professional, lawyer and financial advisor job security act of 2017. 

The [pass-through] deduction leaves a gaping hole in the tax code, and the goal by the 

end of the presentation today is to make you guys the bus drivers, or the truck drivers, 

to drive right through that hole with your clients. 

• A powerful incentive for wealthy Americans to shelter large amounts of income in 

corporations. The law creates a powerful incentive for wealthy Americans to shelter large 

amounts of income in corporations by slashing the corporate rate to 21 percent, far below the 

top individual tax rate of 40.8 percent (the new 37 percent top individual income tax rate plus 

the 3.8 percent Medicare payroll or net investment income tax rate). This will entice wealthy 

people to shield their labor or interest income from the top individual rate by setting up a 

corporation and reclassifying their income as corporate profits in order to pay the lower 

corporate rate. 

These new tax avoidance opportunities threaten the integrity of the tax system, particularly 

coming when the IRS enforcement budget has been drained by 25 percent in real terms since 2010.14 

Law Does Relatively Little for Low- and Moderate-Income Americans- and 

Hurts Many 

I have just outlined the three fundamental flaws of the 2017 tax law. Let me now examine in more 

detail how the 2017 tax largely leaves behind low- and moderate-income Americans- and indeed 

hurts many. 

The 2017 tax law should have placed top priority on raising the living standards of low- and 

moderate-income households, given decades of staguant working-class incomes and growing income 

inequality. The share after-tax income flowing to the bottom 60 percent fell by 3.8 percentage points 

between 1979 and 2015, while the share flowing to the top 1 percent rose by 5.6 percentage points.15 

!2 Samantha Jacoby, "Pass-Through Deduction Regulations Reflect Industry Lobbying," CBPP, January 30, 2019, 

https:/ /w,vw.cl)pp.orp-lblop- pa,.;s.-through-Jcductlon-rqmlation~-reflect-mlhtstry-lohbyine-. 

13 Emily Horton, "Tax Planner: Drive Wealthy Clients Through 'Gaping Hole" in Tax Code," CBPP, 1\lay 31,2018, 

https: / I www .cbpp.oqr /blof I tax -planner .Jnye-\Vcalth;.· .clients-through-ttaptne-hok-·in-tax-code. 

"Roderick Taylor, "House Bill Leaves IRS Enforcement Depleted," CBPP, May 24, 2018, 

https:/ (\\"\\"\\'.cbpp orvlblog 1

housc-bill-kaYcs-irs-t·nforccmcnt-dcplctcd. This blog post was written based on the House 

Appropriation Committee's 2019 funding bill, but the enforcement figure of 25 percent remains the same in the final 

appropriations bill as well. 

15 The share of income going to the top 1 percent increased from 7.4 to 13.0 percent, while the share going to the 

bottom 60 percent fell from 36.3 to 32.5 percent. See: Congressional Budget Office, "The Distribution of Household 

Income, 2015," November 8, 2018, https.: 1 !w\\w.cbo.p-oy/puhlication/:::;4646. Income shares have been recalculated to 

exclude households with negative income. 

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And looking at the "working class" - a racially and geographically diverse group often defined as 

families with working-age adults in which no one has a college degree - real working-class median 

income rose by only about 3 percent from 1979 to 2015. 16 

2017 Tax Law Largely Left Behind Low- and Moderate-Income People 

The drafters of the 2017 tax law ignored key tools they could have used to raise living standards 

for low- and moderate-income people. The Child Tax Credit (CTC) and Earned Income Tax Credit 

(EITC) are provisions of the tax code that lift the living standards of millions of working families. A 

growing body of evidence also links income from these tax credits to better infant health, improved 

school performance, higher college enrollment, and projected increases in earnings in adulthood for 

children in families that receive them. 17 The 2017 tax law could have substantially helped low- and 

moderate-income households by boosting these tax credits in ways that would benefit them, but 

instead it: 

1. Increased the CTC in a way that largely left behind millions of working families, while 

doing much more for high-income families. 18 

The law increased the maximum CTC from $1,000 to $2,000 per child- but denied that full 

increase to millions of children in low-income working families. 

• 11 million children in low-income working families will receive just a token CTC 

increase of just $1 to $75. Before the 2017 tax law, the CTC was a maximum tax credit of 

$1,000 per eligible child under age 17. However, many low- and moderate-income working 

families could not receive the maximum credit - so increases to the maximum do nothing to 

help them. That's because working families with children under 17 with incomes too low to 

owe much or any income tax could get only part of the CTC as a tax refund. Before the 2017 

tax law, that refundable amount was limited to 15 percent of a family's earnings over $3,000. 

The 2017 tax law lowered the threshold so that earnings over $2,500 would count towards 

earning a CTC. This translates to a CTC increase of just $7 5 (15 percent of $500) for those 

families - such as a single mother with two children who works full time at the federal 

minimum wage and earns $14,500 a year. (See Figure 2.) 

• Another 15 million children in low- and modest-income working families get a CTC 

increase of more than $75- but often far less-than the full $1,000-per-child 

increase. That's because the 2017 law introduced a new cap on the refundable amount of the 

credit, at $1,400 per child (indexed for inflation), meaning that for millions of children in 

moderate-income working families their CTC increase was limited to no more than $400 per 

16 Chuck Marr, Brandon DeBot, and Emily Horton, "How Tax Reform Can Raise Working-Class Incomes," CBPP, 

October 13, 2017. hHps: I lwww.cl>pp.org/researrh /federal-tax /Jm\v-tax~reform-can-raise·-working~dass-incomes. 

17 Chuck Marr eta/., "EITC and Child Tax Credit Promote Work, Reduce Poverty, and Support Children's 

Development, Research Finds," CBPP, updated October 1, 2015, https: I I \\""\nv.cl>pp.orp-I research/ federal-tax /eitc-andchild -1'lx-crcdit-promote-work-reducc-pm·crty -and -support--childrens. 

18 "2017 Tax Law's Child Credit: A Token or Less-Than-Full Increase for 26 i\!illion Kids in Working Families," CBPP, 

August 27, 2018, https:/ /w\.nv.cbpp.org/ rf'search/federa1 tax/2(ll-:--tax la\vs-child-credit a-token-.qr-less-than .full 

increase-for-'~6-millitm. 

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child. For example, a married couple with two children making $24,000 will get an $800 

increase in their total CTC -well below the $2,000 maximum. 

• The largest CTC increases go to high-income families. The credit now begins to phase 

out for married couples making $400,000 a year, compared to $110,000 under prior law. A 

married couple with two children making $400,000 are now newly eligible for a full $2,000-

per-child CTC, a $4,000 increase. 

Lowest-Income Families Largely Left Out of New Tax 

Law's Child Tax Credit Increase 

Tax credit increase compared to previous law. 2018 

Single mother with two children earning $14,500 (full-time, minimum wage) 

~ $75 

Married couple with two children earning $24,000 

$800 

Married couple with two children earning $100,000 

$2,000 

$4,000 

Source: CBPP <lnalySIS 

P()L !CY PHIURI1 1L S U:\PP ORG 

This outcome was a deliberate choice by the law's drafters: negotiators agreed last-minute to a 

deeper cut in the top individual tax rate, but rejected calls to use that same funding source - a slight 

reduction in the law's cut in the corporate tax rate- to deliver more than a token ere increase to 

11 million children in low-income working families. 

2. Ignored the Earned Income Tax Credit, a critical tool for boosting workers' incomes. 

Stagnant working-class wages call for a strong policy response, and the EITC is well-designed to 

be at the forefront of addressing this challenge. It already lifts millions out of poverty and 

supplements the wages of a diverse group of working-class people who do needed jobs but receive 

relatively low pay, from truck drivers to cooks to home health aides.19 And it can be strengthened to 

19 Jennifer Beltran, "Working-Family Tax Credits Lifted 8.9 i\!illion People Out of Poverty in 2017," CBPP,January 15, 

2019, https· 1 1\\<'\\·w.chpp.org/bl<w /working-family~qx nedits-lifted 89 million-people-out of-po\•etty-in-201'7. 

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do more. But, despite former Speaker Paul Ryan's purported commitment to strengthening the 

EITC,20 no boost in the EITC was proposed or included in the 2017 tax law. Indeed, a provision of 

the law (discussed below) erodes the value of the EITC over time. 

Provisions That Hurt Many Low- and Moderate-Income Households 

In addition to failing to address the economic challenges that low- and moderate-income people 

face, the 2017 tax law included provisions that will hurt many such households. For example, it: 

1. Risks harming workers' wages and workplace standards due to its pass-throngh 

deduction. The law's 20 percent deduction for pass-through businesses is overwhelmingly 

tilted to the highest-income filers. My colleagues have also explained that the deduction may 

fuel a move towards "fissured workplaces," because it creates an incentive for firms to buy 

workers' services without employing them direct1y.21 Examples include hiring workers as 

"independent contractors" instead of as employees, or by hiring workers through another 

firm (such as contracting out janitorial services to another firm). Workers employed in some 

of these fissured workplace arrangements tend to be paid less than workers that firms employ 

directly, extensive evidence shows. 

2. Retains and creates incentives for companies to shift profits and investment offshore, 

which risks weakening workers' wages. The law moves U.S. international tax system 

towards a "territorial" system, where most profits that a U.S. parent company earns from its 

foreign subsidiaries aren't subject to U.S. tax under certain conditions. That risks a big, 

permanent incentive for U.S. multinationals to shift overseas not just profits on paper, but 

also actual investment, in ways that could hurt U.S. workers' wages.22 The law has several 

provisions to try to limit the damage this basic incentive could cause, but still leaves in place a 

large incentive to shift profits offshore. 23 Further, one of those anti-abuse measures - a new 

minimum tax on certain foreign income - is poorly designed and has its own incentives for 

companies to shift profits and investments overseas. 

Ironically, during the 2016 presidential campaign, then-candidate Donald Trump proposed to 

immediately tax profits made from overseas investments just like profits from domestic 

investments are taxed, which would have avoided these problems. But, President Trump 

dropped his proposal and joined congressional Republicans in pushing for a territorial 

system. 

3. Leaves millions more people uninsured or facing higher premiums. The 2017 tax law 

repealed the Affordable Care Act's requirement that most people enroll in health insurance 

20 Dylan Matthews, "Obama is testing Paul Ryan's commitment to fighting poverty, and Ryan is failing badly," Vox, 

December 2, 2014, https: I I'\V"-V'\v.rox.com('Ol4/ 12/2; "7120)6 3/enr-rhild-credit-ryan. 

21 Brendan Duke, "2017 Tax Law's Pass-Through Deduction Could Encourage 'Workplace Fissuring,"' CBPP, 

December 20,2018, https:/ lu.."'\\tw.rbpp.ot-g 1blog/2()1"7 ·tax-laws p'1Ss through-deduction could-encourage-'.vorkplare 

fissurinl1· 

22 Jane Gravelle, "1be Need for Comprehensive Tax Reform to Help American Companies Compete in The Global 

Market And Create Jobs for American Workers," House Ways and Means Committee heating, l\lay 12, 2011, 

https:/ /www.gpo.gov / fdsys/pkg/CHRG-112hhrg 70882/html/CHRG-112hhrg 70882.htm. 

23 Kimberly Clausing, "Profit Shifting Before and After the Tax Cuts and Jobs Act," SSRN, October 29, 2018, 

https: I I pttpcrs.$srn.com/ sol? /p,lpers.cfm?abstract td-327 482~. 

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coverage or pay a penalty. In 2019 alone, eliminating that penalty will raise the number of 

uninsured by 4 million and raise premiums in the individual insurance market by about 10 

percent, according to the Congressional Budget Office (CB0).24 

4. Erodes the EITC for millions of working-class households. The law uses a slower 

measure of inflation to adjust tax brackets and other tax provisions each year. Over time, this 

will raise taxes across the board. And for low- and moderate-income families, it means the 

maximum EITC will increase more slowly. By 2027, a married couple making $40,000 with 

two children will see their federal EITC shrink by $283 in 2027 (from $5,025 to $4,742). 

5. Ends the CTC for 1 million children- overwhelmingly "Dreamers." The law ends the 

CTC for 1 million children lacking a Social Security number in low-income working families, 

who are overwhelmingly "Dreamers" with undocumented status brought to the United States 

by their immigrant parents.25 

6. Adds $1.9 trillion to deficits over 2018 to 2027, putting pressure on critical economic 

security programs and investments.26 As noted above, baby boomers are retiring, and the 

nation needs to address years of underinvestment in priorities like basic infrastructure, child 

care, job training, and to face new challenges like climate change. More revenues, not less, are 

needed to face of these challenges. 

Further, even before adding $1.9 ttillion to deficits for tax cuts tilted to the top, the law's 

drafters made clear in their budget proposals and statements that their preferred way of 

addressing deficits would be to cut programs that help families of limited means afford health 

care, food, housing, and other basic needs.z' For example, those budgets have consistently 

featured large cuts in Medicaid, which provides health and nursing home care to millions of 

these families. Low- and moderate-income Americans should not now be left holding the tab 

for tax cuts tilted to the top, through cuts to, or underinvestment in, critical priorities. 

Instead, lawmakers can reverse course and raise substantially higher progressive revenues to 

meet national challenges. 

The Appendix provides for each state examples the impacts of the 2017 tax law that exemplify 

how it favors the most well-off instead of low- and moderate-income Americans.28 

l.J- Tara Straw et al., "Strong Demand Expected for i\ifarketplace Open Enrollment, Despite Administration Actions," 

CBPP, October 31, 2018, https:/ i\\)VW.cbpp.oqr/rescarch/health/..,tronty··dcmand-exp('cted-for-marketplace-opcncnrollment-desptte-administration# ftn11. 

25 Jacob Leibenluft, "Tax Bill Ends Child Tax Credit for About 1 !\Jillion Children," CBPP, December 18, 2017, 

https· I 1\V\V\.v.cbpp.org/blog/ tax bill-enJs .. child~nx~credit~for ~olbOitt·l million-children. 

26 Proponents of the law such as Treasury Secretary Steven Mnuchin claim that the tax cuts will pay for themselves by 

increasing economic growth. Yet, estimates from CBO that take into account the law's macroeconomic impact as well as 

increase in interest payments on the added debt still put its 2018-2027 cost at $1.9 trillion. 

27 Robert Greenstein, "Commentary: With Tax Cuts for the Top, GOP Leaders Now Aim Budget Cuts at the Bottom," 

CBPP, December 21, 2017, http<.:: I /w\nv.cbpp.org/ research I fedcntl-tax I commematT-with-tax-cuts~for-the-top~goplelders-now-aim-budget -cuts-at-the. 

28 .-\ more detailed, interactive version of this Appendix can be found at: https:/ /www.cbpp.org/federaltax/ fundamentally-flawed-2017 -tax-law-largely-leaves-low-and-moderate-income-americans#mapEmbed. 

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Conclusion 

To undo the damage caused by the 2017 tax law and meet national needs, lawmakers can craft 

meaningful tax reform that eliminates various loopholes, shelters, and gaming opportunities the tax 

code now contains, raises much-needed revenue, and is more favorable to working households with 

low or modest incomes. In heading towards this goal, lawmakers can keep in mind that: 

10 

• Only a basic restructuring of the 2017 tax law can fix its flaws, as they stem from the 

law's core provisions. For example, the corporate rate cut and the 20 percent deduction for 

pass-through businesses contribute to all three of the measure's major flaws: they worsen 

inequality by disproportionately benefiting the well-off; they lose significant revenue at a time 

when demographic and other pressures require federal revenue to rise; and they will likely 

encourage significant tax avoidance by creating major incentives for wealthy individuals to 

recharacterize their income in search of lower taxes. Minor tinkering cannot solve these 

problems. 

• Improving the EITC and CTC should be top priorities of any restructuring effort. 

Building on the success of these credits for workers and families is a sound way to raising the 

living standards of the low- and moderate-income Americans who were largely overlooked by 

the 2017 tax law, and who have faced decades of economic challenges. 

o As noted above, 15 million children in low-income working families received just a 

token CTC increase from the 2017 tas law, and 15 million children in low- and 

moderate-income working families were left out of the full increase. To fix these 

shortcomings and ensure that low- and moderate-income families are not left out, the 

CTC should be made fully refundable so that low- and moderate-income families 

receive the full $2,000-per-child credit. At the very least, the CTC should be set to 

phase in at the first dollar of earnings, at a higher rate, and without a $1,400 

refundability cap. 

o In the EITC, a key priority should be fully extending the EITC's pro-work success to 

childless adults. In contrast to families with children, the EITC for workers not 

raising children in the home remains extremely small- too small even to fully offset 

federal taxes for workers at the poverty line. As a result, low-wage workers not raising 

children are the sole group that the federal tax system taxes into, or deeper into, 

poverty. After helping childless workers, policymakers should further expand the 

EITC for families with children since the credit is well placed to feature in efforts to 

boost working-class Americans' incomes. A substantial EITC improvement for these 

families would help mitigate decades of working-class income stagnation. 

• In the interim, any true "technical corrections" to fix drafting mistakes in the tax law 

cannot compound the flaws of the 2017 tax law itself- and should instead start to fix 

them. For example, former Ways and Means Chairman Kevin Brady proposed last year a 

"technical corrections" package that would have helped restaurant and retail owners while 

doing nothing for millions of their workers. As my colleague has written, "To be sure, the 

authors of the 2017 tax law omitted full expensing for restaurant and retail business owners 

inadvertently, while omitting[ ... ] CTC and EITC improvements for low-wage workers by 

design. But if ignoring these workers was a major mistake the first time, as it surely was, then 
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ignoring them again would compound the error."29 As was the case in in 2018, no technical 

corrections package that delivers a valuable fix to business owners or other high-income filers 

should be passed unless the package also starts to make progress for the millions of children 

and workers who were left out or largely left out of improvements in tax credits for working 

families. This means starting to make down payments on the EITC and CTC changes 

mentioned above. 

• Any budget deal should include adequate funding of the IRS, and particularly for IRS 

enforcement. IRS enforcement funding overall has been cut by 25 percent since 2010, after 

adjusting for inflation, and the enforcement division has lost roughly 30 percent of 

its "{Orkforce over that period. The cuts have driven a more than 40 percent decline in the 

rate of audits - especially for high-income individuals and large corporations. And 

enforcement needs have only grown as a result of the 2017 tax law. 

Not only is restoring IRS enforcement levels to adequate levels critical for the integrity of the 

tax code, it is also fiscally sound. CBO estimates that once staff ttaining and computer 

upgrades are completed, each $1 of additional enforcement funding would generate $5.20 in 

additional revenue."' Moreover, the Treasury Departtnent notes that this return on 

investtnent likely is understated because it includes only the amounts directly recovered; it 

does not reflect the effect that enhanced enforcement has on deterring non-compliance. This 

deterrence could triple the rate of return on each additional dollar invested in IRS 

enforcement, the Office of Management and Budget (OMB) has written." 

When Congress negotiates a new budget agreement, it should include a Trump 

Administtation proposal to improve the enforcement of the nation's tax laws by adding IRS 

enforcement funding that doesn't count against the annual cap on overall funding for nondefense appropriations. There is a lengthy bipartisan history of exempting from the cap 

certain types of program integrity funding - to reduce errors, overpayments, and fraud in 

government programs and taxes- that OMB estimates will produce net savings.32 That 

approach to IRS enforcement funding is especially timely now, given the IRS enforcement 

division's depleted personnel and its coming workload increase under the 2017 tax law. 

29 Chuck Marr, "House GOP Tax Fix for Restaurant, Retail Owners Leaves Out !\Jillions of Their Workers," CBPP, 

December 6, 2018, https: / / \\'\VW.cbpp.orv /hlog lhou~e·gop ·tax-tix. for·restaurant-retad-owncrs-le·wes-out-millions-oftheir-workers. 

3° Congressional Budget Office, "Options for Reducing the Deficit: 2019 to 2028," p. 307, December 13, 2018, 

https:! /w\\"\v.cbo.tt<l\-/system/ filc<:>tilc=2()18-12 I 5466 "7 -budget<>ptions.pdf. 

31 Office of Management and Budget, FYI7 President's Budget Appendix, p. 1047, 

https:/ (ob·J.mnwhiwhouse 1\\Thin.;s.gm,-I sites/ default /ftles/ omb llmdgt·t/fy201- /··tsscts/tre.pdf. 

32 For Qj\ffi's calculation of the net savings derived from the proposed IRS cap adjustment, see Office of r..fanagement 

and Budget, see Office of Management and Budget, FY19 Analytical Perspectives Table 10-2, P.110, 

https: / /'-\:'-'-'V.\vhitchmi:>e.p-m· lwp-content/uploads/2018/02/ap l!l proccss .. f}·201 9.pdf. 

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Appendix 

TABLF :1 

Effects of the 2017 Tax Law by State 

Alabama 

Alaska 

Arizona 

Arkansas 

California 

Colorado 

Delaware 

District of Columbia 

Florida 

_Geor~a __ 

Hawaii 

Idaho 

Illinois 

Indiana 

Iowa 

Kansas 

Ken_tuck~. 

Louisiana 

Maine 

Maf!~~~~~-

Mi!!SissliJPI 

Missouri 

Montana 

Nebraska 

Nevada 

-~~~-~-~~~~ire 

~-~!~~~~!~.- New Mexico 

New York 

North Carolina 

North Dakota 

12 

Number of children 

in working families 

receiving less than 

the full CTC 

increase, 2018 

440,000 

54,000 

678,000 

309,000 

3,532,000 

182,000 

63,000 

37,000 

1,658,000 

1,047,000 

91,000 

159,000 ----~-~"~------- -- 994,000 

572,000 

209,000 --~----··-··------·-

238,000 

386,000 

464,000 

78,000 

337,000 "'-- --~------~--

317,000 

• ~~14,()()() 

483,000 

79,000 

152,000 

272,000 

Average tax 

cut for top 1 

percent, 2019 

$49,660 

$73,010 

$54,250 

$42,220 

$26,890 

$62,920 

$71,030 

$40,780 ~-- ~~-~-~--~-----~~--

$81,240 . --~ -~~---~-- - $98,480 

$64,620 

$39.420 

$48,220 

$58,750 

$48,840 

$43,060 

$60,150 

$37,870 

$54,230 ------ ~-----------------~---

$31,900 

$52,360 

Average tax cut 

for bottom 60 

percent. 2019 

-$370 

-$510 

-$410 

-$410 

-$580 

-$510 

-$350 

-$330 

-$370 

- -~-~--~~----- --~---

$84,720 

$57,700 

$42,700 

. $:3!;,97() 

$48,840 

$52,550 

$50,750 

$104,700 

-$310 

-$370 

-$290 

Number of 

estates wealthy 

enough to 

benefit from 

estate tax cut 

40 

90 

30 

1,230 

90 

40 

40 

50 

30 

20 

100 

20 

Increase in 

individual market 

premiums for a 

family of four, 2019 

$2,230 

$2,900 

$2,060 

$1.450 

N.A. 

N.A. 

$2,070 _, _ _, ____ ,. ____ ~---~------

$1,690 """'"""~""'""""'" 

$1,900 

$2,350 

N.A. 

80 $2,120 - ~~-· ~--- ----~-~ ----~-~~ ~ 

20 $2,100 

40 $3,070 

$1,730 -. ---~ ................. .. 56,000 $57,320 40 $1,900 ----·~----~·~·--------

..... ?'1~,()0()__ -. _!3_0.~4() ···- ~~-~!;_2()~ ·······---~1:6()_ $1,650 --~~----~~--~~--~-

240,000 $38,440 -$410 20 $1,660 ---~---~----~-

·-· . ·-· -~'-~8~0_()0 ___ ~~ ~_!2_9,89()_ 

~9.00_0 ~ _ ~-__$_44,_760_ 

41,000 $60,280 
41 


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TABLE l 

Effects of the 2017 Tax Law by State 

Ohio 

Number of children 

in working families 

receiving less than 

the full CTC 

increase, 2018 

Average tax 

cut for top 1 

percent. 2019 

Average tax cut 

for bottom 60 

percent. 2019 

Number of 

estates wealthy 

enough to 

benefit from 

estate tax cut 

Increase in 

individual market 

premiums for a 

family of four. 2019 

$1,480 

$2,630 

$1,650 ·-- - '""-···-··-

prevent dtsclosu:e of tndiVIdllal (8\pa~t'r mformat•oP to SrrlBII number 

13 
42 

Chairman YARMUTH. Thank you very much for your testimony. 

I now recognize Ms. Bruckner for five minutes. 

STATEMENT OF CAROLINE BRUCKNER 

Ms. BRUCKNER. Thank you for inviting me and, by extension, the 

American University students who are here with us today. Today, 

I want to share with you how my research indicates the need for 

a comprehensive strategy to study how some of the business tax expenditures included in tax reform impact women business owners, 

99 percent of whom are small businesses; how health care costs for 

small businesses have been impacted by tax reform; and, lastly, the 

need to consider the budget implications of tax reform’s failure to 

address the tax compliance challenges of the gig economy. 

First, this committee needs to develop a comprehensive strategy 

to study and give oversight to business tax expenditures to consider 

their impact and effectiveness with respect to women business owners. This research matters because 40 percent of U.S. businesses 

are women business owners, yet they remain primarily small businesses operating as service firms and continue to have challenges 

growing their receipts and accessing capital. Notably, women of 

color are the driving force behind the growth of women-owned 

firms. And while we do have good news on their growth in numbers, women business owners still struggle to access capital to grow 

and scale their businesses. At the same time, tax plays a key role 

in the survival and growth of small businesses, primarily through 

its effect on equity infusion. However, to date, there has been no 

formal government or congressional study on how the U.S. tax 

code’s more than $303 billion of expenditures targeted to small 

businesses impact women-owned firms. This is troubling considering in 2017, I found—I published groundbreaking research that 

found that Congress has a billion-dollar blind spot when it comes 

to understanding how business expenditures help these firms. In 

fact, three of the four small business expenditures I studied either 

explicitly excluded service firms and, by extension, the majority of 

women-owned firms, or effectively bypassed women-owned firms 

who are not incorporated or who are service firms with few capitalintensive equipment investments altogether. 

Congress doubled down on this billion-dollar blind spot during 

tax reform when it made additional multibillion-dollar investments 

in tax expenditures that our research suggests are less favorable 

to women business owners. For example, JCT’s analysis of the new 

Section 199A deduction for individuals with business income shows 

that the majority, 90 percent, of the revenue distribution loss will 

flow to firms who have incomes greater than $100,000 of revenue. 

Eighty-eight percent of women business owners have revenues 

below $100,000. This inequitable distribution of the revenue loss is 

even greater and more stark at the higher income levels. Only 1.7 

percent of women business owners have revenues over a million 

dollars, yet 44 percent of the revenue loss flows to those firms in 

this year alone. 

A second concerning aspect of tax reform is its impact on health 

care costs for the smallest of small business owners, those self-employed workers who buy insurance on the private markets. However, as part of tax reform, Congress effectively repealed the indiVerDate Mar 15 2010 09:20 May 29, 2019 Jkt 000000 PO 00000 Frm 00046 Fmt 6633 Sfmt 6633 T:\FY 2020\COMMITTEE REPORTS\HEARING REPORTS\2.27.19 2017 TAX LAW IMPACT

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43 

vidual mandate, which CBO estimated would result in 4 million 

fewer people carrying insurance this year, another 13 million in 

2027, and that premiums would increase by 10 percent in most 

years of the next decade. Recent evidence shows that CBO was correct. In fact 2019 premiums, according to at least one estimate, will 

be an average 6 percent higher as a direct result of the individual 

mandate repeal and the expansion of more loosely regulated plans 

than would otherwise be the case. 

And it is not just an increase in premiums that are a cause of 

concern with respect to the impact of tax reform. The reported 

lower refunds taxpayers are receiving due to changes in withholding may have unintended yet painful consequences for taxpayers who anticipated a higher refund and put off health care 

spending until they got their refund. Banking research shows that 

Americans increase their out-of-pocket health care spending by 60 

percent in the week after receiving a tax refund. For those taxpayers who are this year receiving lower refunds, they may have 

to wait even longer to pay for much needed health care costs. 

Finally, I am really concerned about how tax reform failed to address the tax compliance challenges of the 2.3 million Americans 

working in a side hustle in the gig economy. In 2016, I published 

research that shows that more than 60 percent of these workers do 

not get any tax information reporting forms, which means the IRS 

doesn’t, either. Under current law, the platforms are not required 

to publish these forms to the workers or the IRS until those workers meet a $20,000, 200-transaction threshold. But the reality is, 

most folks with a side hustle in the gig economy never meet that 

$20,000 threshold and therefore are not getting the tax information 

reporting forms that they need to actually pay their taxes. This has 

dire consequences with respect to the budget, as well as their ability to fund their own Social Security contributions. 

However, Congress was well aware of this issue and chose not 

to act in connection with tax reform. These are issues that Congress and this committee should be tracking and studying as it 

moves forward with its oversight of tax reform. 

Thanks so much and I am happy to answer any questions that 

you have. 

[The prepared statement of Caroline Bruckner follows:] 


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~ KOGOD SCHOOL of BUSINESS 

tiJj AMERICAN UNIVERSITY • WASHINGTON, DC 

2017 Tax Law- Impact on the Budget and American 

Families 

Hearing of the United States House of Representatives 

Committee on the Budget 

VVednesday,Feb.27,2019 

\'Vritten Testimony of Professor Caroline Bruckner, 

Executive-in-Residence, Accounting and Taxation 

Managing Director, Kogod Tax Policy Center 

Kogod School of Business, American University 
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Kogod Tax Policy Center Prof. Caroline Bruckner, \V'ritten Testimony, Feb, 25,2019 

Chait Yarmuth, Ranking Member Womack, Committee Members and Staff, thank you for the 

opportunity to testify today. My name is Caroline Bruckner and I am a tax professor on the faculty 

at American University's Kogod School of Business. I also serve as the Managing Director of the 

Kogod Tax Policy Center (KTPC), which conducts non-partisan policy research on tax and 

compliance issues specific to small businesses and entrepreneurs. Our ntission is to develop and 

analyze solutions to tax-related problems faced by small businesses, and promote public dialogue 

concerning tax issues critical to small businesses and entrepreneurs. Thank you for inviting me, 

and by extension, the American University students who are here with us today, to talk about the 

budget impact of the Tax Cuts and Jobs Act of 2017 (P.L. 115-97) (hereinafter, "tax reform" or 

"TCJA") on America's families and small businesses. 

Prior to joining AU's faculty, I served on the staff of the U.S. Senate Committee on Small Business 

and Entrepreneurship from 2009-2014, ultimately as Chief Counsel. During my tenure with the 

Senate Small Business Committee, I handled tax, labor and budget issues for the committee and its 

chair, and worked with small business stakeholders across the country and political spectrum to 

develop small business legislation. Before public service, I worked in private practice as a tax 

attorney with both Pau!Hastings and PwC's Washington National Tax Services. 

Both my public and private sector experience have informed my research at Kogod, and today I 

want to share with you how my research indicates: (1) the need for a comprehensive strategy for 

study some of the tax expenditures included in tax reform with respect to women business owners, 

99% of whom are small businesses;1

(2) how health care costs for small businesses have been 

impacted by tax reform; and (3) the budget implications of tax reform's failure to address the tax 

compliance challenges of the small business owners powering the gig economy. 

1 Michael J. McManus, Issue Brief Number 13: Women's Business Ownership: Data from the 2012 Survey of Business 

Owners, Office of Advocacy, U.S. Small Business Administration {May 31, 2017), available at 

21Pil 
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Kogod Tax Policy Center Prof. Caroline Bruckner, Written Testimony, Feb. 25,2019 

1. Congress Needs to Conduct Oversight on the Effectiveness and Distribution of 

Business Tax Expenditures with Respect to Women Businesses Owners. 

The Committee's effort to conduct oversight on the budget impact of tax reform is commendable, 

and the Committee should develop a comprehensive strategy of study and oversight of business 

tax expenditures to consider their impact with respect to women business owners. Although 

millions of women business owners should see some tax savings from the marginal rate cuts and 

other expenditures included in tax reform, our research suggests that additional taxpayer 

investments in expenditures targeted to individuals with business income (IRC §199A) and small 

business owners (IRC §179) effectively "doubled-down" on a billion-dollar blind spot Congress 

has when it comes to women business owners and the U.S. tax code. This Committee, pursuant 

to House Rule X, has express jurisdiction to study this billion dollar blind spot and shed light on 

any findings. 2 

In June 2017, we published Billion Dollar Bli11d Spot /-low t!Je C'.S. '1~1.'.' Code:r Small I3;t.rim.r.r Tax 

Ex/Jmdi/;;r~.r Impad Ir"o!l!fll Bu.iine.r.r (hvnen, ground-breaking research on how the U.S. tax code's 

small business tax expenditures targeted to help small businesses grow and access capital impact 

women-owned ftrms. 3 Our fmdings with respect to four specific tax expenditures targeted to small 

businesses (i.e., IRC §§1202, 1244, 179 and 195) raised questions as to (i) whether the U.S. tax 

code's small business tax expenditures were operating as Congress intended; and (ii) whether the 

cost of these expenditures had been accounted for in terms of their uptake by women-owned 

firms.' 

'Rules of the U.S. House of Representatives, Rule X, cl.4(b)(6), available at 

https://rules.house.gov/sites/ democrats.rules.house.gov /fi!es/116-1/116-House-Ru!es-Clerk.pdf (noting the Budget Committee's 

authority to 1'request and evaluate continuing studies of tax expenditures, devise methods of coordinating tax expenditures, 

policies, and programs with direct budget outlays, and report the results of such studies to the House on a recurring basis." 

'Bruckner, C.L. (2017). Billion Dol/or Blind Spot: How the U.S. Tax Code's Small Business Expenditures Impact Women Business 

Owners. Kogod Tax Policy Center Report, available at 

https://www.american.edu/kogod/research/upload/blind spot accessible.pdf. 4 1n BiJJion Dollar Blind Spot, we detailed the legislative history and Congress' intent to provide access to capital and opportunities 

for growth to small businesses with respect to four specific tax expenditures (i.e., IRC §1202 -100% Exclusion from Capital Gains 

Tax for Investments in Qualified Small Business Stock; IRC §1244- Ordinary Loss Treatment/or Investments in Small Business 

Stock; IRC §179- Expensing for Small Businesses; and IRC §195- Deduction for Qualified Start·Up Casts). Each small business tax 

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Kogod Tax Policy Center Prof. Caroline Bruckner, Written Testimony, Feb. 25,2019 

This research is particularly important because although women business owners account for 40% 

of all U.S. ftrms and the total number of women-owned ftrms has increased over the last ten years 

by 58%, women business owners remain small businesses primarily operating as service ftrms (more 

than 60%) and continue to have challenges growing receipts and accessing capital. 5 Notably, 

women of color are the "driving force behind the growth of women-owned ftrms." 6 Firms owned 

by women of color grew at a rate of 163% during the last 10 years and today, women of color own 

64% of the new women-owned businesses launched each day. 7 

Despite the good news on their increasing numbers, women business owners still struggle to access 

capital to grow and scale their businesses.8 For example, a 2014 Congressional report found that 

access to capital is a more severe challenge for women-owned ftrms and that women only account 

for 16 percent of conventional small business loans, and 17 percent of SBA loans; which means 

just $1 of every $23 in conventional small business loans goes to a women-owned business.9 At 

the same time, "[t]axation plays a key role in the survival and growth of small businesses, primarily 

through its effect on equity infusion. The major source of equity capital for expansion of a business 

is reinvested proftts. The amount of tax the business must pay determines the amount of money 

available for growth and expansion."10 

expenditure we studied met two criteria: (i) Congress intended the provision to stimulate growth or access to capital or 

investment in smaller firms; and (ii) Each expenditures generated a cost to U.S. taxpayers of at least $100 million. Jd. at 7 (noting 

revenue loss is a key factor in Congress relies on in determining the effectiveness of a tax expenditure). 5 The 2018 State of Women·Owned Businesses Report, Ventureer (2018), available at 

https://about.americanexpress.com!fi!es/doc librarv/file/2018-state-of-women-owned-businesses-report.pdf. 6 /d. 

7 1d. 

8 See, Farrell, Diana, Christopher Wheat, and Chi Mac, "Gender Age and Small Business Financial Outcomes." (2019) JP Morgan 

Chase Institute (finding that "young and female small business owners are well*represented among firms that grow organically, 

but underrepresented among firms with external financing"). 9 Majority Report of the U.S. Senate Committee on Small Business and Entrepreneurship, 21ST CENTURY BARRIERS TO WOMEN'S 

ENTREPRENEURSHIP(2014),https:l/www.sbc.senate.gov/public/ cache/files/3/f/3f954386·f16b-48d2·86ad· 

698a75e33cc4/F74C2CA266014842F8A3D86C3AB619BA.21st-century-barriers-to~women-s-entrepreneurship~revised-ed.-v.l.pdf. 

10 INTERAGENCY TASK FORCE ON WOMEN BUSINESS OWNERS, THE BOTIOM LINE: UNEQUAl ENTERPRISE IN AMERICA. (U.S. Department of 

Commerce) (1978). 

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Kogod Tax Policy Center Prof. Caroline Bruckner, \Vritten Testimony, Feb. 25, 2019 

However, to date, there has been no formal government or Congressional oversight strategy on 

how the U.S. tax code's more than $333.5 billion of tax expenditures targeted to help small 

businesses grow and access capital impact women-owned firms. 11 Ultimately, taxpayers do not 

know if the money Congress has spent on tax breaks to help businesses access capital has been well 

spent or equitably distributed. This is particularly troubling considering that three of the four small 

business tax expenditures we studied in Billion Dollar Blind Spot (i.e., IRC §1202, §1244, and §179) 

were so limited in design that they either (i) explicitly excluded service firms (e.g., IRC §1202), and 

by extension, the majority of women-owned firms; or (ii) effectively bypassed women-owned firms 

who are not incorporated (IRC §1244) or who are service firms with few capital-intensive 

equipment investments altogether (IRC §179). 12 

However, neither Congress nor Treasury or SBA has ever studied or conducted oversight on how 

the U.S. tax code's business expenditures impact women business owners. Moreover, neither the 

IRS nor J CT collect data or conduct analysis on the distribution of business tax expenditures with 

respect to women-owned f1ro1s. 13 This means we have a billion dollar blind spot when it comes to 

11 Joint Committee on Taxation (JCT), Estimates of Federal Tax Expenditures for Fiscal Years 2018·2022, JCX-81-18 (Oct. 4, 2018), 

available at https://www.jct.gov/publications.htm!?func=startdown&id-5095. Total includes JCT's 5-year estimates of {1) 

expensing under Section 179 ($67.88); (2) 20% deduction for qualified business income ($2596); and (3) exclusion of gain from 

certain small business stock ($6.78). 12 Billion Dollar Blind Spot, supra n. 3. As part of our research, we conducted a survey of the members of Women 

Impacting Public Policy (WIPP) and its coalition partners. We designed our survey to gauge whether and how familiar selfidentified women business owners are with the tax expenditures we studied and whether those women-owned firms accessed 

them. WIPP and its coalition partners invited their memberships to participate in the online Survey Monkey survey, which was 

conducted from March 9, 2017 through Aprilll, 2017. We received 515 completed responses from women who, on their own, 

or with other women, owned at least 51% of a business, from the more than 550,000 WIPP or coalition partner members invited 

to participate in the survey. Our survey data of 515 experienced, engaged women business owners corroborated our research 

findings, and suggested that when women-owned firms can take advantage of tax breaks, they do (see., e.g._, uptake rates for IRC 

§195). 

13 For example, Congress designed IRC §1202, which allows angel investors to invest in qualified small business corporations, to 

explicitly exclude service firms. Our research found that this limitation has resulted in only a very small minority of women 

business owners being able to utilize it. In fact, we identified only three women business owners who had ever used IRC §1202 to 

raise capital for their business. Keep in mind, this is a $6.7 billion tax break Congress specifically designed to enable small 

businesses to attract capital. While we expect that more than three women-owned firms have used this provision since 1993, we 

don't have publicly-available IRS or Treasury taxpayer data to prove it. Similarly, with respect to IRC §179, our survey results 

found that women business owners claimed this tax break at significantly lower rates (47%) than existing government research 

finds for businesses generally (60% to 80%}. This tax break is one of the more expensive small business tax incentives (i.e., it will 

cost taxpayers $67.8 billion from 2018-2022), and yet we don't have any IRS or Congressional research on how it benefits women 

business owners, and what research we do have suggests that women business owners benefit less than businesses generally. 

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Kogod Tax Policy Center Prof. Caroline Bruckner, Written Testimony, Feb. 25,2019 

understanding how effective and equitable tax expenditures are, and the latest distributional analysis 

from JCT on certain provisions from tax reform indicates that Congress doubled-down on it. 14 

In fact, our assessment of two of the key tax investments of the TCJA (§199 and §179), which 

Congress designed based on two of the small business tax incentives we studied (§1202 and §179), 

confums that questions we raised in Billion Dollar Blind Spot were not robusdy investigated in 

connection with Congress' efforts on tax reform. 15 Instead, Congress made additional billion 

dollar investments in tax expenditures that our research suggests are less favorable to women 

business owners in terms of distribution of tax benefits, which the JCT's April2018 distributional 

analysis supports. 

For example, according to Table 3 of JCT's distributional analysis of the TCJA, more than 90% of 

the revenue loss generated from the new deduction under IRC §199A will flow to firms with 

income of more than $100,000 in 2018 and 2024. 16 However, the most recent data available finds 

that 88% (or 1 0,775,600) of women business owners generate revenues less than $100,000. 17 

This inequitable distribution is even more pronounced when considered at higher income levels: 

only 1. 7% of women-business owners have receipts of $1,000,000 or more, but !CT found in 2018 

44% of the IRC §199A will flow to pass through businesses with $1.000 000 of income. Moreover, 

14 For more on the history of tax expenditure analysis, see Anthony C. lnfanti, A Tax Crit Jndentity Crisis? Or Tax 

Expenditure Analysis~ Deconstruction and the Rethinking of a Collective Identity, 26 Whittier L. Rev. 707 (2005). 15 We submitted summaries of our research and links to Billion Dollar Blind Spot to multiple Congressional committees in 2017 

during the tax reform debate. See e.g.~ Bruckner, Caroline (July 27, 2017). Statement for the Record to the U.S. House of 

Representatives Committee on Ways & Means Tax Policy Subcommittee in connection with July 13 hearing, ~'How Tax Reform Will 

Help America's Small Businesses Grow and Create New Jobs."; Bruckner, Caroline (July 17, 2017). Submission to the U.S. Senate 

Finance Committee in Response to the Chairs Request for Recommendations/or Tax Reform; Bruckner, Caroline {June 28, 2017). 

Statement for the Record to the U.S. Senate Committee on Small Business and Entrepreneurship in Connection with the June 14 

Hearing Titled, "Tax Reform and Barriers to Small Business Growth." See also~ Bruckner, C. l. {August 30, 2017), '

1

Women in 

Business Must Be a Priority in U.S. Tax Reform Plans" FINANCIAL TIMES, available at https:llwww.ft.com/content/ebda758c-8cb7-

lle7-a352-e46f43c5825d. 

"JCT, Tables Related to the Federal System as in Effect 2017 through 2026 (JCX-32R-18), (April 24, 2018), available at 

https:!/www.jct.gov/pub!ications.html?func-=startdown&id-S093. 

17 The 2018 State of Women·Owned Businesses Report, supra n. 5 at 9. 

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Kogod Tax Policy Center Prof. Caroline Bruckner, Written Testimony, Feb. 25, 2019 

JCT projects that the 44% will increase to 52% by 2024. 18 These alarming estimates warrant 

immediate study and oversight by this Committee. Taxpayers are entitled to: (i) a government 

accounting of the distribution of the $415 billion JCT estimated Section 199A will cost with respect 

to women business owners; and (ii) an analysis as to whether high-earning women businesses 

owners-the majority of whom are in services and are excluded from claiming Section 199A above 

certain thresholds-will be effectively barred from being able to use this tax break to grow their 

businesses. 19 

While most women business owners will no doubt see some limited benefit from IRC §199A, 

JCT's distributional analysis raises serious questions as to the equity of the distribution of this tax 

expenditure with respect to women-owned firms, who constitute 40% of all U.S. firms. In 

addition, our research suggests additional oversight and tax research is warranted with respect to 

the TCJA's investments into expanding IRC §179. 

2. Impact of Tax Reform on Health Care Costs for Small Businesses 

One of the most concerning aspects of tax reform is impact on health care costs for small 

businesses. Small businesses remain deeply concerned regarding the affordability of health care. 20 

In fact, the 4.4 million self-employed small business owners who purchase health care for 

themselves and their families on the individual market are acutely vulnerable to increases in 

18 JCT, supra n. 16 at Table 3. See also, Exhibit A. 19 In general, the deduction is available to sole proprietors, independent contractors, and owners of S corps, 

partnerships, and LLCs. However, if taxable income exceeds certain thresholds ($315,000 MFJ, $157,500 everyone else), 

and business is a "specified service trade or business," no deduction is available. For purposes of Section 199A the term 

"Specified Service Business" is based on Section 1202 and includes firms involving performance of services in fields of 

health~ law, accounting, actuarial science, performing arts~ consulting, athletics, financial services~ brokerage services, or 

any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its 

employees or owners or involves performance of services involving investing or trading. As noted in Exhibit A, half of 

women-owned businesses are concentrated in three industries: other services, health care and social assistance, and 

professional/scientific/technical services. 20 See, e.g., NIFIB Letter to Ways and Means Chair Brady (Jan. 2018), available at https://www.nfib.com/assets/NFIB· 

letter-of-Support-Healthcare-Tax-Delay-legislat!on-Ol-2018.pdf. 

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Kogod Tax Policy Center Prof. Caroline Bruckner, Written Testimony, Feb. 25,2019 

healthcare costs, which represent a "material expense for nonemployer business owners." 21 As 

part of tax reform, Congress effectively eliminated the penalty that individual taxpayers who have 

no health insurance and are not exempt from the mandate must pay. In November 2017, during 

the tax reform debate, CBO issued a report finding that repealing the individual mandate would 

result in 4 million fewer people carrying insurance in 2019 and 13 million in 2027.22 In addition, 

CBO found that "average premiums in the nongroup market would increase by about 10 percent 

in most years of the decade."23 Essentially, CBO found that eliminating the individual mandate 

would mean fewer healthy people would buy insurance, "especially in the nongroup market" and 

"the resulting increases in premiums would cause more people not to purchase insurance." 24 More 

than a year later, there is some evidence CBO's estimates were accurate. 

For example, an October 2018 issue brief prepared by the Kaiser Family Foundation found that 

"among insurers that publicly specify the effect of these legislative and policy changes in their 

filings to state insurance commissioners, we found that 2019 premiums will be an average of 6% 

higher, as a direct result of the individual mandate repeal and expansion of more loosely regulated 

plans than would otherwise be the case."25 Although health care insurance premiums "may be flat 

or even falling in some places, they would be substantially lower still if not for these policy 

changes." 26 

21 Farrell, Diana, Christopher Wheat, and Chi Mac (2017}~ "Paying a Premium: Dynamics of the Small Business Owner 

Health Insurance Market." JPMorgan Chase Institute, available at 

https://www.jpmorganchase.com/content/dam/jpmorganchase/en/!egacy/coroorate/instltute/document/institute~ 

smb~health-insurance.pdf. 

"Congressional Budget Office, Repealing the Individual Health Insurance Mandate: An Updated Estimate (Nov. 2017), 

available at www.cbo.gov/publications/53300. CBO also found that repealing the individual mandate would reduce 

deficits by $338 billion between 2018 and 2027. 

23/d. 

24/d. 

25 Kaiser Family Foundation, How Repeal of the Individual Mandate and Expansion of Loosely Regulated Plans are 

Affecting 2019 Premiums {Oct. 2018), available at https://www.kff.org/health-costsfjssue~brief/how-repea!~of-theindividual-mandate-and-expanslon-of~!oosely-regulated-p!ans-are-affecting-2019-premiums/. 

26/d. 

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And it's not just an increase in premiums that are a cause for alarm with respect to the impact of 

tax reform. The reported lower refunds taxpayers are receiving as a result of changes in 

withholding may have unintended, but nevertheless, painful consequences for taxpayers who 

anticipated higher refunds. For example, banking industry research shows that Americans 

"increase their out-of-pocket healthcare spending by 60 percent in the week after receiving a tax 

refund, and the majority of the increase goes towards in-the-moment, in-person care." 27 For those 

taxpayers who this year are receiving lower refunds, they may have to wait even longer to pay for 

needed healthcare costs. Although tax reform did in fact create tax savings for most Americans, 

the distribution of those savings through lower withholding rather than through a higher refund 

amount may have unintended health care purchasing implications. This Committee should be 

aware of and tracking these issues in connection with its oversight efforts of tax reform's impact 

on American families. 

3. Tax Reform's Failure to Help Small Businesses Driving the Gig Economy 

Finally, I am very concerned that tax reform failed to address the tax compliance challenges of the 

2.3 million Americans working side-hustles every month in the gig economy, which directly impact 

these taxpayers' ability to pay their taxes and be credited with Social Security contributions. 28 In 

2016, I published research detailing the findings of a survey on the tax compliance challenges of 

gig economy workers, and found that more than 60% of the population I surveyed did not receive 

any tax forms for the income they earned working with a platform and the IRS didn't either. This 

is because gig economy platforms such as Uber, Lyft, Esty, Airbnb and others are not required to 

report to the IRS income paid electronically or to send information reporting forms to service 

27 Farrell, Diana and Fiona Greig. "On the Rise: Out~of-Pocket Healthcare Spending in 2017." JPMorgan Chase Institute, 

(2018), available at https:/lwww.jpmorganchase.com/coroorate/institute/document/institute~on~the-rise-report.pdf: 

Farrell, Diana, Fiona Greig and Amar Hamoudi "Filing Taxes Early, Getting Healthcare late: Insights from 1.2 million 

households" JPMorgan Chase Institute (2018), available at 

https://www.lpmorganchase.com/corporate(lnstitute/insight-filing-taxes-early.htm. 

28 Bruckner, C.L. and Thomas Hungerford (2019). Failure to Contribute: An Estimate of the Consequences of Non-and 

Underpayment ofSelf-Employment Taxes by Independent Contractors and On~Demand Workers. Boston College Center for 

Retirement Research Working Paper, available at https://crr.bc.edu/working-papers/failure-to-contribute-an-estimate-of-theconseguences-of-non-and-underpayment-of-self-employment-taxes-by-independent-contractors-and~on-demand-workers-onsocial-securitv/. 

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Kogod Tax Policy Center Prof. Caroline Bruckner, Written Testimony, Feb. 25,2019 

providers and sellers until a $20,000 and 200 transaction threshold is met. 29 However, the majority 

of gig economy workers do not earn enough income or engage in enough transactions over the 

course of a year to trigger information reporting. 30 This means that there is a 63% likelihood that 

the billions of dollars these millions of taxpayers earn is misreported. 31 I testified before the House 

Small Business Committee as to these findings in 2016 and 2017, and worked extensively with 

Congressional staff in the last Congress to develop bipartisan legislation, the Small Business Owners 

Tax Simplification Act (H.R. 3717), to help these taxpayersY 

Notwithstanding these efforts, the final tax reform legislation failed to address this issue, which is 

a growing problem that subjects millions of taxpayers to audit and penalty exposure. In fact, recent 

IRS data shows that the underpayment of estimated taxes rose 40% from 2010 to 2015 up to 10 

million from 7.2 million." As a result, there are significant budget and Social Security 

consequences for taxpayers for this growing problem. For example, in January, Boston College 

Center for Retirement Research published my latest research, I 'ailurc to Contribute, which 

reviewed existing estimates on the size and growth of the gig economy and independent 

contractors, and estimated that in 2014 alone, the independent contractors and gig workers I 

studied failed to properly report more than $7.35 billion in self-employment taxes. Moreover, the 

29 Bruckner, C. L. (2016). Shortchanged: The Tax Compliance Challenges of Small Business Operators Driving the On-Demand 

Platform Economy. Kogod Tax Policy Center Report, available at https://www.american.edu/kogod/news/Shortchanged.cfm. 30 Diana Farrell, Fiona Greig, & Amar Hamoudi. 2018. "The Online Platform Economy in 2018: Drivers, Workers, Sellers and 

lessors.11 JPMorgan Chase Institute (Sept. 2018), https://www.ipmorganchase.com/corporate/institute/documentfinstituteope-2018.pdf {finding average month income ranges in four key sectors of the gig economy were: (1} transportation 

($783/month); (2) leasing ($1,736/month); (3) selling ($608/month); and other services ($793/month) and that earnings 

represented a major sources of supplemental not primary income). 31 Shortchanged" supra n. 28 (citing U.S. tax gap data noting that where income is not subject to withholding or 

information reporting there is a 63% chance of taxpayers misreporting). 32 Bruckner, C. L (February 15, 2018). "Congress Failed to Fix Tax Woes for Gig Workers." The Chicago Tribune, available at 

https://www.chlcagotribune.com/news/oplnlon/commentary/ct-perspec~gig-economy-taxes-uber~!yft~alrbnb-0216-20180215-

story.html. The Sharing Economy: A Taxing Experience for New Entrepreneurs Part 1: Hearing Before the U.S. House Comm. on 

Small Business, 114th Congress (testimony of Caroline Bruckner) (May 2016), https://sma!lbuslness.house.gov/uploadedfiles/5-

24·16 bruckner testimony .pdf ("House May 2016 Testimony")· Small Business Tax Reform: Modernizing the Code for the 

Nation's Job Creators: Hearing Before the U.S. House Comm. on Small Business, 115th Congress (testimony of Caroline Bruckner} 

(Oct. 2017}, httos://sma!lbus!ness.house.gov/uploadedfiles/10-4~17 bruckner testimony.pdf. 33 laura Saunders, Number of Americans Caught Underpaying Their Taxes Surges 40%, THE WAll STREET JouRNAl, {Aug. 11, 

2017) available at https:!/www.wsj.com/artides/the-numberof-americans-caught-underoayingsomet;;~xes-surges-40-

1502443801. 

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Kogod Tax Policy Center Prof. Caroline Bruckner, \X-'ritten Testimony, Feb. 25,2019 

problem of underreporting is not confined to platforms who don't furnish 1099-Ks to their service 

providers and sellers. Following our research, Treasury's Inspector General released a new report 

earlier this month finding that the expansion of the gig economy warrants a focus on improving 

self-employment tax compliance because, in part, IRS failed to work cases forTY 2012 to TY2015 

involving $12 billion of payments by gig platforms to workers that potentially wasn't reported. 34 

Last month, the Chair and Ranking Member of the House Small Business Committee once again 

introduced bipartisan legislation to address this issue (H.R. 593, Small Business Owners' Tax 

Simplification Acf), and going forward, I urge members of this Committee to consider the growing 

budget implications of failure to act to facilitate tax compliance by these workers and platforms. 

Conclusion 

This Committee should be congratulated on holding this hearing and immediately set to work to 

develop the needed oversight on the distribution of business tax expenditures with respect to 

women business owners. The existing lack of research and effective Congressional oversight on 

how business tax expenditures impact women business owners constrains policymakers from 

developing evidenced-based policymaking on the effectiveness of tax expenditures overall and 

denies taxpayers information crucial to understanding how their money is being distributed among 

firms. In addition, this Committee should continue to track the budget implications of how tax 

reform's changes impact the affordability of health care for small businesses. Finally, this 

Committee should study the ongoing and growing budget implications of the expanding gig 

economy. We stand ready to aid the Committee in this important work on behalf of the millions 

of small businesses impacted by these issues. 

34 U.S. Treasury Inspector General for Tax Administration, Expansion of the Gig Economy Warrants Focus on Improving 

Self-Employment Tox Compliance, Reference Number: 2019-3D-016 (Feb. 14, 2019), available at 

https:l/www.treasury.gov/tigta/auditreports/2019reports/201930016fr.pdf. 

11IP•ge 
55 

Chairman YARMUTH. Thank you very much. 

I now recognize Ms. Pol for five minutes. 

STATEMENT OF LANA POL 

Ms. POL. Good morning, Chairman Yarmuth, Ranking Member 

Womack and members of the House Budget Committee. My name 

is Lana Pol. I am an owner of multiple small businesses in and 

around Pella and Des Moines, Iowa. I serve as the president of 

Geetings, Incorporated; G.I. Warehouse Corporation; Mowbility 

Sales and Service; and Creative Inspirations. Thank you for inviting me today to testify. 

Geetings, Incorporated, was founded in 1972 by my father, 

Delroy Wayne Geetings. Dad completed only a sixth-grade education but his drive and motivation made him a successful entrepreneur. His many businesses included a landfill, a filling station, 

a pool hall, a car dealership and an excavating company. Fortyseven years later, the company continues to operate using Dad’s 

motto for life, ‘‘If it’s worth doing, it’s worth doing right.’’ 

In 1975, Geetings expanded to the nearby town of Knoxville with 

the building of a warehouse and the founding of G.I. Warehouse 

Corporation. Additional warehouses were built to fulfill demand. 

Geetings, Incorporated, and G.I. Warehouse Corporation continue 

to operate based on Dad’s original values of integrity, honesty, respect and loyalty and are committed to delivering quality service 

one customer at a time. 

I joined the company on a full-time basis in 1975. I bought out 

my retiring brothers in 2011 and 2012 and became the sole owner 

of Geetings, Incorporated, and G.I. Warehouse Corporation. In 

2015, I carried on my father Wayne’s tradition of entrepreneurship 

and opened two new small businesses along with the next generation, my children. Mowbility Sales and Service is an outdoor power 

equipment retailer and service provider in Pella and Des Moines. 

Mowbility recently purchased Odyssey Spas and moved into selling 

new products like spas, swimming pools and hot tubs. Creative Inspirations is a promotional product distributor, specializing in apparel and customer fulfillment also in Pella. Both of these businesses are rapidly expanding. I hope to pass the businesses on to 

the third and fourth generations of our family. 

The 2017 Tax Cuts and Jobs Act provided tax relief that allowed 

us to invest in our employees with raises and invest in our businesses with a significant facility expansion and new vehicles. The 

new tax law also increased local and national business confidence. 

Together, these factors continue to benefit our local and national 

economies. Two of the most significant direct benefits from the new 

tax law for our businesses were the creation of the new small business deduction, Section 199A, and the expansion of the small business expension, Section 179. 

For tax filing purposes, our businesses are organized as S corporations and LLCs, meaning the business earnings flow through 

to my individual tax return. The vast majority of small businesses 

are organized similarly. The creation of the new small business deduction provides substantial tax relief for businesses like ours, with 

a deduction up to 20 percent from business income. 


BU00-A363290 with DISTILLER
56 

My accountant informed me that the new small business deduction will provide around $40,000 in tax relief for our businesses. 

This tax relief provides crucial cash flow that allowed us to provide 

up to $4,000 raises to our employees, the largest raises we have 

been able to provide in recent years. These raises increased employees’ take-home pay and helped us retain employees. As you 

know, businesses across the country are experiencing tight labor 

markets, an indicator of a strong economy. The labor market is especially tight in Iowa. Retaining high-valued employees is key for 

our business to function. 

Additionally, we invested $2 million in a nearly 40,000-squarefoot expansion of G.I. Warehouse Corporation, which was completed in December. We are now up to 460,000 square feet in warehouse space. We have filled the warehouse space, another strong 

economic sign. 

The new tax law doubled the small business expensing thresholds of the tax code from 500,000 in 2017 to over a million dollars 

in 2018. This expansion incentivized us to purchase six new semitrucks totaling a million dollars and will allow us to immediately 

expense the cost of the trucks in 2018 instead of depreciating that 

amount over several years. 

I have observed other small businesses in and around Pella also 

investing in employees and companies. Multiplying our experience 

by millions of small businesses around the country demonstrates 

significant economic benefits resulting from the Tax Cuts and Jobs 

Act. 

Many of the provisions benefitting individuals and small businesses, like the small business deduction, sunset after 2025. That 

sunset date makes small business owners nervous about future expansion. To provide long-term certainty and confidence for small 

businesses, Congress should make these provisions permanent. I 

urge Congress to pass bills like the Main Street Tax Certainty Act. 

Thank you for the opportunity to testify. I look forward to answering any questions. 

[The prepared statement of Lana Pol follows:] 


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TESTIMONY BEFORE THE UNITED STATES CONGRESS 

ON BEHALF OF THE 

NATIONAL FEDERATION OF INDEPENDENT BUSINESS 

~ NFI B. 

Written Testimony of Lana K Pol 

President/Owner, Geetings, Inc. 

before the 

United States House of Representatives 

Committee on the Budget 

2017 Tax Law: Impact on the Budget and American 

Families 

Wednesday, February 27, 2019 

NFIB 

1201 F Street, NW Suite 200 

Washington, DC 20004 

1 
58 


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Good morning, Chairman Yarmuth, Ranking Member Womack, and members of the House 

Budget Committee. My name is Lana Pol. I am an owner of multiple small businesses in and 

around Pella and Des Moines, Iowa. I serve as the President of Geetings, Inc., G.l. Warehouse 

Corporation, Mowbility Sales and Service, and Creative Inspirations. Thank you for inviting me to 

testify at this important hearing on the 2017 tax law's impact on the budget and American 

families. 

Geetings, Inc. was founded in 1972 by my father, Delroy "Wayne" Geetings. Dad completed only a 

sixth-grade education, but his drive and motivation made him a successful entrepreneur. His 

many businesses included a landfill, a filling station, a pool hall, a car dealership, and an 

excavating company. Forty-seven years later, the company continues to operate using Dad's 

motto for life: "If it's worth doing, it's worth doing rightl" 

In 1975, Geetings expanded to the nearby town of Knoxville with the building of a warehouse and 

the founding of G. I. Warehouse Corporation. As the need for storage space increased, additional 

warehouses were built to fulfill demand. Geetings, Inc. and GJ Warehouse Corporation continue 

to operate based on Dad's original values of integrity, honesty, respect, and loyalty, and are 

committed to "delivering quality service, one customer at a timel" We also value community, 

responsibility, equality, innovation, family, attitude, uniqueness, and faith. 

I joined the company on a fulltime basis in 1975. I bought out my retiring brothers in 2011 and 

2012 and became the sole owner of Geetings, Inc. and GJ Warehouse Corporation. In 2015, I 

carried on my father Wayne's tradition of entrepreneurship and opened two new small 

businesses along with the next generation, my children. Mowbility Sales and Service is an 

outdoor power equipment retailer and service provider in Pella and Des Moines. Mowbility 

recently purchased Odyssey Spas and moved into selling new products like spas, swimming 

pools, and hot tubs. Creative Inspirations is a promotional product distributor specializing in 

apparel and customer fulfillment in Pella. Both of these businesses are rapidly expanding. I hope 

to pass the businesses onto the third and fourth generations of our family. 

The 2017 Tax Cuts and jobs Act provided tax relief that allowed us to invest in our employees with 

raises and our businesses with a significant facility expansion and new vehicles. The new tax law 

also increased local and national business confidence and optimism. Together, these factors 

continue to benefit our local and national economies. Two of the most significant direct benefits 

from the new tax law for our businesses were the creation of the new Small Business Deduction 

(Section 199A) and the expansion of Small Business Expensing (Section 179). 

For tax filing purposes, our businesses are organized as pass-through entities - S corporations 

and LLCs - meaning the business earnings flow through to my individual tax return. The vast 

majority of small businesses are organized similarly as pass-through entities. The creation of the 

new Small Business Deduction (Section 199A) provides substantial tax relief for businesses like 

ours, allowing pass-throughs to deduct up to 20 percent from business income. 

My accountant informed me that the new Small Business Deduction (Section 199A) will provide 

2 
59 


BU00-A363290 with DISTILLERInsert offset folio 45 here 35567.045

around $40,000 in tax relief for our businesses. This tax relief from the new tax law provides 

crucial cash flow that allowed us to provide up to $4,000 raises to our employees, the largest 

compensation increases we have been able to provide in recent years. These raises increased 

employees' take-home pay and helped us retain employees. As you know, businesses across the 

country are experiencing tight labor markets, an indicator of a strong economy. The labor market 

is especially tight in Iowa. Retaining highly-valued employees is key for our businesses to function. 

We are not alone. Record levels of small business owners are increasing employee 

compensation. Over the last 14 months since the enactment of the new tax law, at least 30 

percent of small business owners have reported compensation gains each month, a level that 

had been reached only once since 2001. 1 

Additionally, we invested $2 million in a nearly 40,000 square foot expansion of G.l. Warehouse 

Corporation, which was completed in December. We are now up to 460,000 square feet in 

warehouse space. We have filled the warehouse space, another strong economic sign. 

The new tax law doubled the Small Business Expensing (Section 179) thresholds of the tax code 

from $500,000 in 2017 to over $1 million in 2018. This expansion incentivized us to purchase six 

new semi-trucks totaling $1 million and will allow us to immediately expense the cost of the 

trucks in 2018 instead of depreciating that amount over several years. 

I have observed other small businesses in and around Pella also investing in employees and 

companies. Nationally, the NFIB Small Business Optimism Index has remained historically high 

throughout 2018 and early 2019. We have experienced this optimism firsthand. Multiplying our 

experience by millions of small businesses around the country demonstrates significant 

economic benefits resulting from the Tax Cuts and jabs Act. 

Congress can help further. Many of the provisions benefitting individuals and small businesseslike the Small Business Deduction (Section 199A)- sunset after 2025. That sunset date makes 

small business owners nervous about expansion. To provide long-term certainty and confidence 

for small businesses, Congress should make these provisions permanent. The House of 

Representatives voted to make these provisions permanent last September. I urge similar votes 

this Congress on bills like H.R. 216, the Main Street Tax Certainty Act. 

Thank you for the opportunity to testifY. I look forward to answering any questions. 

1 NFIB Research Center, NFIB Small Business Economic Trends, February 12, 2019. 

3 
60 

Chairman YARMUTH. I thank you all for your testimony. We will 

now begin the question and answer part of the hearing. And, as is 

our habit, the ranking member and I will defer our questions to the 

end. So I now recognize Mr. Higgins of New York for five minutes. 

Mr. HIGGINS. Thank you, Mr. Chairman. 

Firstly, Dr. Gale, you had talked about three criteria as it relates 

to testing growth, fairness and a fiscal test, all of which this tax 

cut failed. Is there any tax cut that actually pays for itself? 

Mr. GALE. There certainly are situations where reducing a tax 

rate could pay for itself. For example, if you had a 95 percent tax 

rate on some form of income, you reduced it to 90 percent, you 

would likely end up raising revenues because you are doubling the 

after-tax return there from 5 to 10 cents on the dollar. But none 

of that really applies. We are way over on the other side of the socalled Laffer curve. 

Mr. HIGGINS. Mark Zandi from Moody’s Analytics, a former adviser to John McCain, had said that the best-case scenario for a 

corporate tax cut is a return of 32 cents for every dollar that you 

give away in a tax cut, corporate tax cut. So that would say to me 

that your return on investment from that tax cut is minus 68 percent. Is that a fair characterization? 

Mr. GALE. We will clearly get some revenue offset from corporate 

tax cuts. There will be some, we will not lose 100 percent. But it 

really depends on what part of the corporate tax system is cut. Cutting the rate, which is what happened in 2017, is the least efficient 

way to generate new investment. Because a huge amount of current corporate investment is income from investment in the past. 

And so cutting the rate does not do anything to boost investment 

in the past. You get a much bigger bang for the buck if you give 

incentives to new investment. 

So, for example, if we raise the corporate rate to 25 or 28 but 

also moved all the way to expensing, we would get more investment and more revenues than the current system. 

Mr. HIGGINS. When this corporate tax bill was originally made 

public as a proposal, the White House Council of Economic Advisers had stated in a formal communication to the House Ways and 

Means Committee that this proposed tax cut would increase household income by between $4,000 and $9,000 and this would be recurring, this would happen on an annualized basis. I do not have any 

evidence that that materialized. Is there any evidence that there 

has been an increase in household income to the extent to which 

the White House Council of Economic Advisers had stated that it 

would? 

Mr. GALE. Well, the CEA was very careful not to specify a date 

by which that would happen. So I do not think anyone expected it 

to happen in the first year. But they expect income to rise by 4,000 

to 9,000 above what it otherwise would have risen. I find that extremely unlikely and I will refer back to the CBO numbers I mentioned earlier that, after 10 years, national income will only go up 

by one tenth of 1 percent. 

Mr. HIGGINS. Who is the Council of Economic Advisers? 

Mr. GALE. The White House group of economists. 

Mr. HIGGINS. And that would include perhaps the Treasury Secretary? 


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61 

Mr. GALE. No, sir. The CEA is set of staff members. There are 

three members of the council, Kevin Hassett being the head of the 

council right now. And I think there are about 15 or 20 staff members, that they work for the White House. 

Mr. HIGGINS. Okay. How could they be so far off? 

Mr. GALE. The document cites the literature in a number of 

ways. But I and others, when we look at the literature, reach different conclusions than the CEA does. 

Mr. HIGGINS. Who is the author of the literature? 

Mr. GALE. There are numerous, numerous articles. 

Mr. HIGGINS. So they are economists. They are looking for literature presumably from other economists. So I am just kind of curious as to what the Council of Economic Advisers, who would they 

defer to in order to inform them of a decision that they have to 

make a formal report on the White House Council of Economic Advisers stationery to Congress. 

Mr. GALE. Normally, they would look at the academic literature. 

But it is not always easy to interpret these numbers. For example, 

there was a study in Germany that half of the corporate tax is 

passed on to workers and people try to use that in the United 

States but it is not a valid comparison because the governmental 

units in Germany are much smaller than the overall size of the 

U.S. economy, so the amount of shifting of the tax will be different. 

Mr. HIGGINS. I know my time has expired but let me just say 

this. So the White House Council of Economic Advisers, who make 

a report to Congress, may have made reference to the literature on 

economics that was established by economists in Germany? 

Mr. GALE. So they cite a lot of the literature. My point is, I think 

that I and others who have looked at the same literature would 

reach different conclusions from it. 

Mr. HIGGINS. I yield back, thank you. 

Chairman YARMUTH. The gentleman’s time has expired. I now 

recognize Mr. Flores from Texas for five minutes. 

Mr. FLORES. Thank you, Mr. Chairman. I appreciate the panel 

for joining us today. 

Some of the testimony today, I think, has been somewhat inflammatory and a little bit reckless, particularly economically reckless. 

I note that on the panel, there is really only one person there who, 

like me, has signed the front side of a paycheck. And I would submit that gives us a much better understanding of the real-world 

economy versus the understanding that may come from looking at 

a model. 

I have a couple examples of the tax impact. I just exchanged text 

messages with a person who owns Blackhawk Aero in Waco, Texas. 

He describes this as a mom-and-pop business that is celebrating its 

twentieth anniversary this year that has gone from zero to $90 million in revenues during that 20-year process. 

Here is what he says. He says the tax cuts can be directly attributable to our significant increase in business. Buyers are able to 

take advantage of the 100 percent depreciation on our products 

that we sell, so the sales uptick increased dramatically by about 40 

percent. And then I am going to go on. He said, we have been able 

to raise pay, we have been able to invest in new facilities, we have 

been able to grow our employee base. And all of that made 2018 


BU00-A363290 with DISTILLER
62 

a record year, and they believe 2019 will be equally as good, moving forward. 

So then I go to another part of my district down in Bryan-College 

Station, Texas. And there is a business there called Village Foods 

and Pharmacies. And it says, to highlight the direct results of the 

Tax Cuts and Jobs Act, the owner has said that they have been 

able to put together bonuses and a brand new 401(k) program for 

all employees. 

And this is just like these stories you hear all over the country. 

This is the real world. This is not something where we are trying 

to reflect some sort of the inflammatory rhetoric that we heard before. 

One of the things that I think is interesting is the talk about a 

carbon tax. A carbon tax would hit the families that some of these 

witnesses talked about as having been impacted adversely by the 

Jobs Act, even though they have more pay than they had before 

and more job opportunities than they had before. It has been said 

a carbon tax would hurt them the worst. Their cost of living would 

go up dramatically under a carbon tax regime. And with the somewhat promise that they would get some of it back from Washington. We have seen Washington break too many promises. 

We have heard claims that the tax act has increased the deficit. 

But, you know, as a person in the real world, when my revenues 

go up, then I am better off. And the country’s revenues, the federal 

government’s revenues have gone up from 2017 to a record in 2018, 

and they are on track to go up again for another record in terms 

of receipts by the federal government in 2019. It is hard for me to 

see how that increases the deficit. 

Now, what does increase the deficit is spending. And this goes 

back to what the GOP leader said a minute ago, in that we do not 

have a revenue problem, we have a spending problem. And so we 

need to look at ways to address the spending. 

What we have heard from the other side of the aisle are huge 

programs they want to roll out like the Green New Deal, which, 

just we got a cost estimate on it the other day of $93 trillion, which 

would represent about 90 percent of the wealth of all the families 

in this country. 

Ms. Pol, I have a question for you, since again you operate in the 

real world, not in an academic world, and you have an understanding of what it means, the challenges it means when you hire 

somebody and you sign the front side of their paycheck every few 

days. 

Can you talk about the impact of some of the tax proposals you 

heard from the other witnesses in their testimony? 

Ms. POL. One of the things that was talked about that really 

stuck out to me was the health care, that it just, that that cost 

health care to go up. My experience has been in the last five years, 

we have had health care increases of 17 percent, 19 percent, 29 

percent and again this year now to 9 percent. So I don’t think that 

the tax, this law, had anything to do with this. This is prior to 

that. And that was through Obamacare when everything started 

skyrocketing on us. So that was one of the reasons that we were 

having a hard time. We have, since 1975, paid 100 percent of our 

employees’ health care costs, family and all. They have no cost out 


BU00-A363290 with DISTILLER
63 

of pocket. And it did not allow us to give any raises. And so that 

is why this was significant for us to have the raises this year. 

Mr. FLORES. Thank you. I yield back the balance of my time. 

Chairman YARMUTH. I thank the gentleman. I now recognize Mr. 

Scott of Virginia for five minutes. Oh, Mr. Doggett is back. Mr. 

Doggett of Texas for five minutes. Sorry. 

Mr. DOGGETT. Thank you very much, Mr. Chairman. In many 

ways, the best label for this tax law is the whopper. And there has 

just been one whopper after another about it. I think Mr. Higgins 

just referred to one of the most significant ones, the claim that 

Americans would receive on average $4,000 in additional household 

income every year. We now know that not only do Americans have 

good reason to be asking, where is my $4,000, or as Secretary 

Mnuchin put it, it would be $4,500 that we would be getting because, in fact, the estimates I have seen is that over 95 percent of 

American workers have not received any bonuses or any wage 

hikes due to this Republican tax law. 

So while there may have been a sugar high for the economy in 

the short term, we know immense debt is coming our way. And the 

$4,000 is just still not available for most Americans. 

But that is not the only whopper. And, Ms. Huang, I would I 

would like to discuss with you the portion of your testimony that 

focused on the international side. Because certainly among those 

who received the greatest rewards were multinational corporations. 

In fact, they got a bonanza out of this. 

Now, President Trump, on one of his many tours to the golf 

course, apparently told executives that we could expect $4 trillion 

that would just come pouring back when they gave this discounted 

rate on these so-called repatriated earnings abroad. How near have 

they come to the $4 trillion of repatriated earnings coming back to 

invest and create jobs here in America? 

Ms. HUANG. So I think nobody has been able to figure out where 

that 4 trillion came from and, to date—— 

Mr. DOGGETT. Well, that is like a lot his numbers. 

Ms. HUANG. And to date, we have seen about 500 billion in repatriated earnings. And we have also seen very little of that flow 

through into increased investment or wages. 

Mr. DOGGETT. Right. Because, as we expressed concern when 

that tax law was being written, in fact what happened the last 

time they had a repatriation, the same thing happened again. And 

that is, the money flowed into stock buybacks and to dividends. So, 

if you were one of the American families who had stocks in one of 

these companies, you maybe did well. But very few, a very small 

portion had that. 

Is it correct that almost all of the money that has come back has 

gone into stock buybacks and dividends and some increase in executive pay? 

Ms. HUANG. And that is absolutely not surprising, as you said. 

I think we mentioned earlier CEA Chair Kevin Hassett. Before this 

bill was enacted, another one of his promises was the suggestion 

that a lot of that money would flow through directly into investments in factories and jobs in the U.S., combined with the cut in 

the corporate rate. 


BU00-A363290 with DISTILLER
64 

If you notice his language since the bill was enacted, he has kind 

of changed his story since then and saying now, oh, well, it was 

kind of expected that you would get this one-time sort of glut of 

buybacks and dividends and so on and so forth. So, the ultimate 

increase in wages for workers seems to be getting further and further away in terms of what we are being promised. 

Mr. DOGGETT. And then another one of the whoppers that was 

told was that there were things in this tax bill that were going to 

prevent the outsourcing of American jobs. In fact, are there not a 

number of provisions that have been added by Republicans in this 

tax law, such as the fact that you might pay nothing or no more 

than half of what you would pay here in America in taxes if you 

invest in Shanghai instead of investing in San Antonio? 

Ms. HUANG. That’s absolutely right. The basic structure of the 

law is that there is a permanently low discounted rate on foreign 

profits as opposed to profits earned in the U.S. And the law in a 

way recognizes that problem and it has a whole series of guardrails 

to try to stop shifting of profits and investment offshore. But one 

of these very measures creates its own new incentive to actually 

shift investment offshore. 

Mr. DOGGETT. As I think you know, I have outsourcing legislation to try to close all those loopholes. Is it important to protect 

American jobs by closing these giant loopholes that Republicans 

created in their tax law to encourage the outsourcing of jobs and 

investment from our country to abroad? 

Ms. HUANG. It is vitally important. And also important to protect 

that revenue that could be put to better use investing in infrastructure and other shared priorities that would help the economy at 

home. 

Mr. DOGGETT. Thanks to all of you. I yield back. 

Chairman YARMUTH. The gentleman’s time has expired. I now 

recognize Mr. Johnson of Ohio for five minutes. 

Mr. JOHNSON. Thank you, Mr. Chairman. I want to thank our 

witnesses for being with us today to have this very, very important 

discussion. You know, especially you, Mrs. Pol, for providing a voice 

of reason for small businesses. That is so vitally important here. 

Small businesses create roughly 60 percent of the jobs in America. 

And without what you and others like you do, our economy falters 

in a very, very big way. So thanks for being here. 

You know, in my part of Ohio, small businesses like yours, one 

for example, Bully Tools in Steubenville, are staples of the economy 

and employ their neighbors in good paying jobs. Bully Tools manufactures equipment for gardening, roofing and other work and is in 

the planning stages of opening a second factory, due to the tax reforms that were passed last session, the Tax Cuts and Jobs Act. 

They were also featured at President Trump’s ‘‘Made in America 

Showcase’’ in the summer of 2017 as the business representative 

from Ohio. 

The people I represent in eastern and southeastern Ohio are, by 

and large, hardworking members of the middle class. But, contrary 

to the rhetoric on the other side, they have seen real benefits from 

the Tax Cuts and Jobs Act. 

There have been some clear benefits for small businesses like 

Bully Tools, such as increasing the thresholds for the estate tax 


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and the alternative minimum tax. And for the 85 percent of families in my district who take the standard deduction, more of their 

money is tax free because the Tax Cuts and Jobs Act nearly doubles the standard deduction for married couples and individual filers. With more money at home, families can support our small 

businesses. 

So, Mrs. Pol, have you seen this type of indirect benefit of tax 

reform in your community and businesses like yours? 

Ms. POL. Yes, we have seen our town really growing and we have 

seen new businesses coming in. We have two large corporations, 

Pella Corp. and Vermeer’s, that supply a lot of our small businesses with work. And that is one of the reasons I am able to build 

a warehouse. So with this coming through, even though some of it 

is going to the large corporations, they are turning it around and 

also allowing small businesses to gain from it, which allows employees to gain. 

Mr. JOHNSON. Okay, well, thank you. You know, one of the most 

often repeated criticisms of the Tax Cuts and Jobs Act is that they 

are supposedly driving our country off a fiscal cliff. The reality is 

that, even with the tax cuts, the federal government is projected 

to bring in a staggering $46 trillion in revenue over 10 years. No 

nation in the world has ever collected more. The federal government clearly has a spending problem, not a revenue problem. And 

it is the out-of-control mandatory spending that is the driver of our 

deficits. 

What I find disconcerting is twofold. My Democrat colleagues 

have proposed to dramatically increase mandatory spending with a 

new spending wish list costing over $50 trillion over the next decade. And, second, they want to pay for their new priorities by increasing taxes on Americans. I am assuming this would include 

rolling back the tax relief that the Tax Cuts and Jobs Act brought 

for all Americans. 

I would refer my colleagues in the majority to an article that 

came out in Roll Call just today. There are some examples. Look 

at the big blue states, states like New York, California, Illinois that 

are struggling to make ends meet. They have got rising deficits. 

Look at states on the other hand—by the way, those states have 

really high tax rates. Look at states like Texas and Florida and 

other states who have understood that there is a phenomenon that 

occurs when you allow the American people to keep more of the 

money that they earn. 

Now it does not match up with the static scoring of CBO and others here in Washington, where we play funny money deals. But I 

can tell you that the American people know real money when it is 

in their pocket. 

So, Dr. Gale, do you think it would be plausible to increase taxes 

to fully pay for the spending wish list? And, if so, what kind of tax 

increases would you suggest to pay for this $50 trillion of new 

spending? 

Mr. GALE. The CBO estimates of TCJA that show that TCJA 

loses substantial amounts of revenue are not static estimates, they 

are fully dynamic. 


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Mr. JOHNSON. That is not the question I asked you. I asked you 

what kind of tax increase do you think it would take to pay for this 

$50 trillion wish list? 

Mr. GALE. I think there are a number of tax increases. We 

should pursue the carbon tax with offsets for low-income households as clearly one of them. The value-added tax with offsets for 

low-income households is clearly another. How we get all the way 

to the number you specified is a different question. But it—— 

Mr. JOHNSON. That is not a number I specified; that is their wish 

list. That is the Democrat wish list, 50 trillion, so—— 

Mr. GALE. How we get to the number you asked me about is a 

different question. I think that even if we do generate judicious 

spending cuts in Social Security and Medicare, if you look at the 

arithmetic of the budget outlook, we will need to raise tax revenues. 

Mr. JOHNSON. Please note, Mr. Chairman, I must qualify, I never 

said cut Social Security and Medicare. I want to make sure. Those 

were your words. That is not where I am suggesting that we cut. 

Chairman YARMUTH. Okay, the gentleman’s time has expired. I 

now recognize Mr. Scott of Virginia for five minutes. 

Mr. SCOTT. Thank you, Mr. Chairman. Mr. Chairman, the ranking member has frequently asked us what our plan is, and I just 

put this chart up here to show that during Republican administrations, the deficit gets worse; during Democratic administrations, 

the deficit gets better. We had PAYGO, where if you have a wish 

list you have to pay for it. And therefore, as opposed to tax cuts 

that are not paid for and put us in the ditch. 

So in response to the question, our plan is the blue, their plan 

is the red. And in terms of jobs, next chart, you can see where jobs 

have gotten better. In about 1990, there was a bipartisan bill 

where President Bush, I guess we misread his lips, and jobs got 

better. During the Clinton administration, they got better. You can 

see it in 2009, at the bottom of 2009, President Obama had an economic plan. 

We passed a $1.5 trillion economic plan and you cannot point to 

where on that chart it even made any difference. So in terms of 

what our plan is, if we could get back to Democratic administrations, we would have a much better budget. 

Dr. Gale, let me ask you a question on tax cuts generally. Some 

tax cuts stimulate the economy, some do not. Which tax cuts tend 

to stimulate the economy? 

Mr. GALE. You will get the biggest bang for the buck for tax cuts 

that get spent rather than saved. And that, typically, in terms of 

households, that is typically money that goes to lower and middleincome households who tend to spend a greater share of their income than high-income households who tend to save more. 

Mr. SCOTT. And so this tax cut where 80 percent of the benefits 

went to the top 1 percent and corporations would miss that mark? 

Mr. GALE. This tax cut was not well designed to boost short-term 

consumption, right. 

Mr. SCOTT. And how did the tax cut miss? We heard how they 

missed women businesses. How did they miss small businesses? 

Mr. GALE. The small business literature issue is confusing. It is 

actually young businesses that create most of the jobs. Most of the 


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small business sector is sort of sleepy and quiet. And just as you 

would not want to confuse small people and young people, you do 

not want to confuse small businesses and young businesses. So, 

what is important is that we generate incentives for young businesses to grow. But if we subsidize all small businesses, we are 

spending a lot of money without getting a lot of bang for the buck 

in terms of the economics. 

Mr. SCOTT. Ms. Huang, you talked about how the passthrough 

deduction hurts individual workers. Can you elaborate on that a 

little bit? 

Ms. HUANG. The problem is that it actually might encourage 

companies to replace good jobs with independent contractors or to 

outsource those jobs to outside contractors. So, my colleague, 

Brendan Duke, has research that shows that it risks pushing more 

workers into low-wage firms or outside the protection of labor laws. 

So many companies already outsource their janitorial staff, the security guard jobs to outside contractors, for example. But the passthrough deduction gives them a tax incentive to do even more of 

that. 

So, if you were to take a company that was considering whether 

to retain its in-house IT department or to contract to an outside 

firm to do that same work, if they contracted to the outside worker, 

that would get the benefit of a passthrough deduction that they 

could then split. So that is a tax incentive to go in that direction. 

Now, that is not really encouraging entrepreneurship or job creation, it is just splitting firms up. 

Mr. SCOTT. And what is wrong, why is the worker at a disadvantage as an independent contractor? 

Ms. HUANG. Well, in the independent contracting case, there is 

a lot of research that shows that pay and benefits and legal protections for independent contractors go down. So even though you 

might get a little bit of passthrough deduction, you could be giving 

up a whole lot in terms of health benefits, workplace protections 

and other benefits that usually come on top of wages. 

Mr. SCOTT. And, Ms. Bruckner, could you say a word about how 

we missed small businesses with the tax cuts? 

Ms. BRUCKNER. I think that we did not do careful thinking about 

what type of small businesses we are going to invest in. Women 

business owners start businesses at rates faster than five times the 

national average and yet we have never considered if small business tax expenditures generally specifically target and help those 

women business owners grow. And we do not know if the money 

we are investing in these business expenditures at all helps these 

businesses start and grow. And, in fact, my research shows that it 

bypasses the majority of women business owners who are very 

small and in services altogether. So, in essence, it could very well 

be that you are subsidizing the same firms over and over again, as 

opposed to investing where there is actually opportunity for economic growth. 

The absence of congressional research and study on these issues 

means that you guys are operating completely blind. 

Chairman YARMUTH. The gentleman’s time has expired. I now 

recognize Mr. Hern of Oklahoma for five minutes. 


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Mr. HERN. Thank you, Mr. Chairman, Ranking Member 

Womack. You know, as a small business owner for the last 34 

years, I find it very interesting to listen to testimony of those who 

actually pay the taxes and those who talk about the tax policy. It 

is pretty fascinating. 

I would like to ask each one of you, I know Ms. Pol has created 

jobs. Have any of the three of you ever actually had to use the tax 

code and whichever tax code to actually create jobs, have employees and be responsible and be the last to get paid? 

Ms. BRUCKNER. Well, I am someone that is actively looking for 

opportunities to start my own small business. But my concern over 

health care cost is precluding me and my husband from starting 

our own small business. It is something that we are actively concerned about and has delayed. Like most of the literature shows, 

when you are disproportionately concerned about stability for 

health care, it delays entrepreneurship. 

Mr. HERN. Perfect. You should have been around about eight 

years ago. 

Yes, ma’am, Ms. Huang. 

Ms. HUANG. I have not employed people. But I also would like 

to say that, also in the real world are the millions of workers who 

receive the paychecks. And I think their voices, including the 11 

million kids that get $75 or less from this bill, is also important 

when thinking about the impacts on the real economy. 

Mr. HERN. Sure, absolutely. Mr. Gale? 

Mr. GALE. I run a small consulting business and have had people 

work for me. They were not employees, they were contractors. 

Mr. HERN. Fair enough. Thank you. I would like to thank you, 

Ms. Pol, for all the work you do and being the last to get paid, because anything that happens to expense your business does affect 

what you take home. And you make sure, as you said, that your 

employees get paid first and that all your vendors get paid. And 

that is no easy task, as a small business owner. 

You know, your story is fantastic. And fortunately, it is not 

unique across the country, as many of my colleagues have brought 

up. Many of my families in Oklahoma’s first district benefit from 

the Tax Cuts and Jobs Act, as well. Today, I would like to highlight 

22,000 of those people in my district. 

A constituent of mine, Norm S. Bjornson, is the founder of 

AAON, a Tulsa-based company who engineers, manufactures, markets and sells air conditioning and heating equipment. Norm employs approximately 2,000 individuals at his Oklahoma and Texas 

facilities. Norm announced personnel employed by AAON on January 1, 2018, excluding executives, will receive a $1,000 bonus in 

recognition of the new tax reform law. 

Additionally, headquartered in Tulsa, QuikTrip Convenience 

Stores employs over 20,000 people, started in Oklahoma, in Tulsa, 

in 1961. Fortune has ranked QuikTrip on the list of best companies 

to work for for 14 years running. QuikTrip also gave their employees bonuses, including part-time employees, and excluding those 

who are considered executives. QuikTrip also credits the ability to 

provide these bonuses to the Tax Cuts and Jobs Act. The bonuses 

range from $500 to $3,000 per employee. Additionally, they are 


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using savings to grow their company and provide opportunities for 

their employees. 

Finally, as a direct result of the Tax Cuts and Jobs Act, Cox 

Communications added roughly $450 million, additional dollars, 

into their employee pension investments to bring solvency to their 

plan. 

You know, I would like to say that, as a direct result of the Tax 

Cuts and Jobs Act, families in my district ended up with more 

money in their pockets this year. Small businesses like my own invested over $2 million last year business of the benefits that were 

brought forth. In addition to the bonuses, added benefits and pay 

raises, the average family in my district received a tax cut of 

around $1,888. 

And to me, this sounds remarkably better than proposed Green 

New Deal, which would cost each American family as much as 

$650,000 per household, we can range from 50 trillion to 93 trillion, 

whichever number you want to pick. And I also find it very interesting that all of a sudden that our colleagues and the witnesses 

are talking more about debt after we started putting taxpayer dollars back into people’s pockets and no one is talking about Democrat proposals coming from this Congress alone that will cost upwards of $100 trillion, and why are we not holding hearings talking 

about that, instead of how we are going to spend more. 

I yield back my time. 

Chairman YARMUTH. The gentleman’s time has expired. I now 

recognize Mr. Peters of California for five minutes. 

Mr. PETERS. Thank you, Mr. Chairman. We missed a real big opportunity to do real tax reform. Real tax perform would have promoted American growth and competitiveness. Instead, Republicans 

chose a path that blows up the deficit and will harm working families in the long run. 

And I was at the microphone protesting this move at that time, 

as were many Democrats. Because debt matters. Debt crowds out 

private investment. Debt gives us less flexibility to respond to 

emergencies. Debt increases the risk of financial crisis. And I sincerely hope my colleagues on both sides of the aisle will examine 

the long-term consequences of ignoring the debt and how this tax 

bill contributed to this debt crisis. 

Mr. Gale, I wanted to ask you, how much did the 2017 tax law 

increase debt and deficits? 

Mr. GALE. Under CBO’s dynamic estimates, the full increase in 

the deficit would be about $1.9 trillion over 10 years. That is for 

the tax cut as it is written. If the tax cut, if the temporary provisions were extended, the net debt, deficit effect would be over $3.1 

trillion. 

Mr. PETERS. Right. And someone suggested that these were static analyses. Can you describe briefly what you mean by dynamic 

in that context? 

Mr. GALE. Sure. Static, what is called a static analysis incorporates a lot of behavioral responses, but it keeps the macroeconomic aggregates constant. So, it keeps output constant but it 

allows people to shift, for example, between different types of saving if it were a proposal to increase IRAs or something like that. 


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A dynamic estimate is also called a macro-feedback estimate. It 

includes the impact on the economy, as well as then how that feeds 

back into revenues, as one of the congressmen was discussing. So, 

it incorporates all of those effects. 

Mr. PETERS. Fair to say it is a more comprehensive view to do 

dynamic than static? 

Mr. GALE. Yes, absolutely. 

Mr. PETERS. Even after the law passed and independent groups 

scored it as increasing the deficit by nearly $2 trillion, the administration claimed that it would pay for itself. Secretary Mnuchin 

claimed, ‘‘So we are humming along on where projections are and, 

as I have said, at 3 percent economic growth, this tax plan will not 

only pay for itself but in fact create additional revenue for the government.’’ 

Mr. Gale, is there any evidence to support this claim? 

Mr. GALE. No. There is, in principle, a growth rate at which the 

tax cut would be revenue neutral. But no one from the CBO to the 

JCT to Mark Zandi who was mentioned earlier, to the Tax Policy 

Center, to others, nobody predicts that the economy will grow at 

that rate. 

Mr. PETERS. If I recall, it was something around over 4 percent 

was the assumed rate at best case? 

Mr. GALE. I believe that’s right. 

Mr. PETERS. And again, as you said, CBO shows that the tax bill, 

even if some provisions expire on schedule, will add $1.9 trillion to 

the debt by 2028 and that extending it this year would cost at least 

another $1.1 trillion through 2029. 

You know, people like to take a shot at my home state of California and their relatively high tax rates. I would just say that 

growth in California has been pretty strong. Do you agree with 

that understanding? 

Mr. GALE. Yes, the economics literature is pretty clear on this. 

There is a very weak relationship between state growth rates and 

state tax rates. 

Mr. PETERS. Right. I would also note that in Kansas, where there 

is a huge effort to cut taxes as unprincipled as this effort in Congress in 2017, voters wised up and removed the governor because 

they wanted to see public investment. And public investment now 

is at a relatively low historical level for the United States of America. And if we wanted to encourage economic growth, and I hope 

we will discuss that in this committee, that would be something we 

would want to consider to invest in. 

Finally, Mr. Gale, when you give tax cuts, when you potentially 

debt finance tax cuts like we did in 2017, is it fair to say that the 

growth impacts are less than debt financing something like infrastructure? 

Mr. GALE. I think in general, yes. It depends on how the tax cut 

gets used. But if a significant percent of it gets used simply to be 

spent, whereas if 100 percent of the infrastructure gets focused on 

new investment, then the infrastructure investment will have a 

bigger impact. 

Mr. PETERS. Well, on trade and on things like the deficit, I invite 

Republicans back to their roots and hopefully we will have that discussion. 


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Chairman YARMUTH. The gentleman’s time has expired. I now 

recognize Mr. Smith of Missouri for five minutes. 

Mr. SMITH. Thank you, Mr. Chairman. I appreciate the opportunity to have this hearing, for us to highlight the benefits of the 

Tax Cuts and Jobs Act. 

I am reminded of a gentleman from my home state, Mark Twain. 

Mark Twain had a quote that said, you can’t depend on your eyes 

when your imagination is out of focus. That is what I am reminded 

by so much of the conversation that I have heard sitting on this 

panel today. 

As one of the original co-sponsors and writers of the Tax Cuts 

and Jobs Act, there is a lot of not serious conversation when we 

are talking, first off, about the statement of a $1.5 trillion debt over 

10 years or a $1.9 trillion of debt over 10 years to pay for the Tax 

Cuts and Jobs Act, whenever more than half of my colleagues on 

the other side of the aisle have signed onto House Resolution 109, 

the Green New Deal, which reports showed yesterday would cost 

$94 trillion, $94 trillion. That is $9.4 trillion a year and you all are 

saying that we are exploding the debt over $150 billion that we 

allow American taxpayers to keep of their money, not the government’s money, of their money. 

So, my question is, to the other side, actually, is when you are 

proposing 12 Democrat colleagues of mine on that side of the aisle 

have co-sponsored the Green New Deal, who want to add $94 trillion, this is what we are dealing with on the budget committee, 

people that are not—not being realistic. 

What I will say is I represent one of the poorest congressional 

districts in Congress, maybe the poorest on this committee. The 

median household income in my district is $40,000 a year of a family of four. Southeast Missouri. And I can tell you that, Mr. Gale, 

your judgment when you look at things of whether it is the wrong 

thing at the wrong time in your opening statement, well I will tell 

you the young lady who got a very nice, sizeable bonus at Lowe’s 

in Rolla, Missouri, when I met with her because of the Tax Cuts 

and Jobs Act, she was able to purchase a new car seat for her toddler because her old car seat was broken. That was at the right 

time, it was not at the wrong time, and it was for the right person. 

I can talk to you about the bank teller in Hartville, Missouri, 

who told me that U.S. Bank, because of the Tax Cuts and Jobs Act 

is now paying all their employees at at least the starting wage of 

$15 an hour. That is real money in Wright County, Missouri. 

I can tell you about the individuals at the call center in Cape 

Girardeau, Missouri, that received a $1,000 bonus from AT&T because of the passthrough of the Tax Cuts and Jobs Act, and the 

savings that they were able to pay for their kids’ college books. 

That is real, real money. 

$850 in southeast Missouri is not crumbs. To some politicians in 

San Francisco, California, it is crumbs. But where they make their 

median income household of $40,000, that is a couple months’ rent, 

that is a couple car payments. So, unless you have been to the 

bootheel of Missouri and you see what my people are experiencing, 

don’t you say that the people of southeast Missouri have not benefitted. 


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We see a growing economy. Right now, we have the largest increase in wages in over a decade. CBO said that. CBO predicted 

more than 900,000 new jobs over the next 10 years. These are 

facts. 

Mrs. Pol, thank you for being here. And I also want to thank you, 

the very last line in your statement, you encourage Congress to 

pass the Main Street Tax Certainty Act. I am with you, that is my 

legislation. So, thank you for highlighting that. And that causes 

real growth for small businesses. 

And Ms. Bruckner, I hope that you have the opportunity to open 

up your small business. And I don’t know why you were not able 

to do it after the Democrats passed Obamacare, because we have 

not changed health care from when they did until last year. And 

when you look at the CBO report, they predicted that by eliminating the mandate, it would take 14 million people off. But CMS 

just reported that it is 2.5 million people that chose not to purchase 

health care because they could find it cheaper somewhere else. 

With that, Mr. Chairman, I yield back. 

Chairman YARMUTH. The gentleman’s time has expired. I now 

recognize Mr. Horsford of Nevada for five minutes. 

Mr. HORSFORD. Thank you, Mr. Chairman. And first I would like 

to start by saying, being an advocate of small business is not a partisan issue. Coming from my district, Nevada’s fourth district, I 

work very closely with my small business community, the metro 

chamber, the urban chamber, the Latin Chamber of Commerce, the 

Asian chamber. I, myself, am a small business owner and have 

helped to create jobs. And so, to suggest somehow that this is a 

partisan issue, I just do not ascribe to that thinking. 

But what is a real fact is that the tax scheme that was passed 

by the prior Congress gave a temporary tax benefit to small business but gave a permanent tax break to big corporations. So, while 

we have these slides today showcasing a number of small businesses by my colleagues in their district which we fully support, I 

guess the question would be why was there not advocacy for them, 

to make their tax break permanent instead of temporary? 

My question is related to the facts and not fake news, is since 

last year, corporate profits have increased by 13 percent from already near record high levels. So why did we give permanent tax 

cuts to big corporations and not help more small businesses so that 

you could predictably plan for the future and hire more people? 

Why did they approve a tax plan with no public hearings in 51 

days and not take into account the fact that, again, according to 

the recent data available, wages are essentially flat since the passage of this tax bill? 

So Ms. Huang, the tax law delivered the largest tax breaks for 

the wealthiest households, specifically corporations. Many analysts 

predicted that because most of the benefits flowed to the richest 

taxpayers, economic inequality would increase. Can you briefly 

elaborate on how the tax law worsens economic inequality as well 

as wage stagnation? 

Ms. HUANG. Absolutely. I think you are absolutely right, I think 

we would like to, I think proponents of the law would like us to 

picture family-run, Main Street businesses who are actually investing and increasing wages. But the fact of the matter is, the bulk 


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of the dollars are hitting to, you know, the big banks that are posting record profits, the private equity firms that are reorganizing as 

corporations in order to get the corporate tax cut, the pharmaceutical companies that are getting big tax cuts without passing 

that on to their consumers or investing in the U.S. 

So overall, following those decades and decades of a larger share 

of the nation’s income going to the top 1 percent, this tax law worsened that by giving bigger tax cuts to the very top than to people 

at the bottom and in the middle. And that in turn, as I mentioned 

in my opening, feeds racial inequities as well. 

Mr. HORSFORD. Thank you. Another point I want to touch on is 

the reality, again, real facts, that millions of taxpayers are now beginning to file their tax returns. And I received a note from a constituent, Kevin, from Las Vegas, Nevada, who wrote to my office 

and told me this is the first year that my husband and I are filing 

married jointly. Our joint refund, which should be in theory have 

been higher than we filed as single, since we both still deduct at 

the single rate. The GOP tax plan touted benefits for married couples making over $120,000 per year. But when we looked at the tax 

filing process, removing the married status and deduction, we 

would have ended up owing the government several thousand dollars more. 

Can either of you speak to the reality that millions of Americans 

are now going to owe more in their upcoming tax filing because of 

the GOP tax scheme that was passed last Congress? 

Ms. HUANG. I think there is undoubtedly a lot of confusion 

around refunds and total tax liability. And that has not been 

helped at all by the rushed enactment and implementation of the 

tax law, along with some of these overblown promises that we have 

heard before. And I think overall, we are hearing a lot of evidence 

that the public knows that the law overall is tilted toward the 

highest income filers. 

I think one of the key examples that I have seen of the misapprehension about what the law does is the repeated statements, for example, from President Trump and Ivanka Trump and Secretary 

Mnuchin about what families with children would get, this $2,000 

increase in their refunds or their child tax credit. When, in fact, 11 

million children in the lowest income families will get $75 or less 

and millions more will get far, far less than the full $2,000 refund. 

So I think going forward, what we want to do is to actually fix 

that and prioritize those families so that they can see something 

of an improvement in their living standards. 

Mr. HORSFORD. Thank you, Mr. Chairman. 

Chairman YARMUTH. Thank you. The gentleman’s time has expired. I now yield five minutes to the gentleman from Georgia, Mr. 

Woodall. 

Mr. WOODALL. Thank you, Mr. Chairman. Thank you for those 

five minutes. I do not know if you are going to go around for a second round of questions. I find when I want to spend my first four 

and a half minutes making a point, it is tough to get to the good 

witnesses after that. 

I had something of value across the board. Ms. Pol, I wanted to 

start with you. Did it ever dawn on you when you thought about 

what Congress was doing as we were trying our very best to get 


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good tax policy that, when you read about those committee hearings, that it would be one witness from one side of the aisle and 

then maybe three witnesses or more from the other side of the 

aisle, or did you think that it was not a stacked deck but an even 

playing filed, just from a distance back home? 

Ms. POL. No, I would not have expected that. 

Mr. WOODALL. I would not have either, and it is certainly the 

way we ran the place when we were running it and it is the way 

it is now and I think that is a shame on some issues like this. I 

heard you say specifically you made different business decisions, 

positive business decisions for your employees because of the passage of the tax bill. 

I heard other witnesses say unequivocally that they worried employees were disadvantaged not by the tax bill in general but specifically because of those passthrough provisions that were targeted 

at your business. And that is a legitimate concern. Everybody cares 

about employees. Do you have a more valuable resource in your 

business than your employees? Can you just go out and find new 

talent if you lose the talent that you have today? 

Ms. POL. No, absolutely not. We have some specifics with truck 

drivers, especially. I just lost one to a death. I am going to have 

a hard time finding somebody in that position and they are valuable. We welcome them to the Geetings family when we hire anybody because that is what they are, they are our family and they 

are our salespeople. 

Mr. WOODALL. Not surprisingly, Dr. Gale made a good point 

when he distinguished between small businesses and young businesses. It is not about maintaining a business model that is failing, 

it is about growing a business model and providing more opportunity in the community. Not to put you on the spot, we have not 

talked about this. You come from a serial entrepreneur family. 

Would you describe yourself as a small business or as a young and 

growing business? 

Ms. POL. I would say we are young and growing yet. We are looking forward to more expansion. 

Mr. WOODALL. I think of one of my constituent companies, 

Boehringer Ingelheim. It is a family-owned business, started in 

1885. They have been a young and growing business since 1885. It 

is now a multinational company. They can do business anywhere 

in the world they want to do business. They just brought an additional 225 jobs to Georgia. This is an animal health sciences company. These are high-paying jobs. This is not a $15-an-hour job, 

which is a great job to get. These are six-figure jobs that could have 

gone to Europe, could have gone to Asia and are coming to America 

instead, because folks have a choice. Multinationals do have a 

choice. 

If you wanted to pick your business up and move it to Europe 

or Asia, I suspect that would be a much more challenging model. 

I want to think about the women-owned businesses that Ms. 

Bruckner referenced. She is absolutely right, we crafted the tax 

code to focus on capital-intensive businesses because, and Dr. Gale 

may be able to speak to this, because we believe that capital-intensive businesses had a higher multiplier effect. But, yes, more small 

businesses are service-oriented businesses. 


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When you think about your peers in leadership back home, have 

you heard that concern before? Folks who said, golly, those capitalintensive small business owners did get a special break that I did 

not get in my service business? 

Ms. POL. I am not really hearing as much of that, at least in 

Iowa. I also belong NAWBO, National Association of Women Business Owners. And so, I have been active in that for a while. And 

a lot of what we are finding is, when we are building, when the 

large companies are building, when we are building small businesses, we actually use their services. And so, you know, I think 

it is helping out all the way through. 

And of course, we are looking at—I look at using women business 

owners, and I support that. 

Mr. WOODALL. Candidly, I have not read the Billion Dollar Blind 

Spot. I am now going to have to think through that, because I 

thought that was a perfectly legitimate criticism. And I wish, Mr. 

Chairman, we had more time to actually talk about individual improvements. What Dr. Gale said about generational inequities, I 

think that is critically important that we talk about. You know, Dr. 

Kotlikoff has talked about that on a regular basis in terms of how 

we measure tax input. 

And one thing that I would like to get us to get back to, Mr. 

Chairman, lots of talk about consumers and lower income families 

being the stimulative effect in a tax cut. Certainly, that is true. Except the Tax Policy Center reports that the bottom quintile, bottom 

20 percent, is paying a negative tax rate today for income taxes. 

About the bottom 40 percent are paying a negative income tax rate 

today. I would be interested to come back and have the conversation. Of course, those dollars are stimulative. Should we do it 

through the tax code or should we do it through the income support 

spending level? I am one of those, Dr. Gale, as you are, that believe 

tax expenditures should be measured as spending programs, not as 

tax programs, and we have not accurately measured those in the 

past, Mr. Chairman. I look forward to that partnership. 

Chairman YARMUTH. Thank you for the idea. We will consider 

that. I thank the gentleman. I now recognize Mr. Panetta from 

California for five minutes. 

Mr. PANETTA. Thank you, Mr. Chairman, Ranking Member 

Womack. I appreciate this opportunity. And to all the witnesses, 

thank you for your time and your preparation, not just for this 

hearing but what you have done to be at this hearing. So, thank 

you very much. 

I am going to pick on Mr. Gale if that is all right. Just a couple 

questions for you, sir. And I am sure you were probably aware of 

this and you probably watched this hearing. But before the tax law 

was passed, you had a number of senior administration officials 

come actually into this committee and talk about the tax law and 

what they attempted and what they wanted to pass. And one of 

them was Mick Mulvaney and I am sure he was, at that point, 

OMB or one of his many positions. I think it was OMB at that 

point. 

And he said, when he testified in front of this committee, ‘‘We 

assumed for the sake of doing the budget that the tax plan is deficit neutral, that removing the exclusions, the deductions, the loopVerDate Mar 15 2010 09:20 May 29, 2019 Jkt 000000 PO 00000 Frm 00079 Fmt 6633 Sfmt 6633 T:\FY 2020\COMMITTEE REPORTS\HEARING REPORTS\2.27.19 2017 TAX LAW IMPACT

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holes would lead us to a deficit-neutral tax plan. The dynamic benefit is only counted one time and that is toward the 3 percent economic growth, and I am happy to explain that further to you if you 

like.’’ 

What I would like for you to explain, Mr. Gale, have these tax 

cuts been deficit neutral? 

Mr. GALE. Every reputable organization that has looked at this 

has found that the tax cuts, lo and behold, reduce revenues. And 

that is including the macro feedback effect. And that is a very wide 

range of organizations. The Congressional Joint Tax Committee, 

the Congressional Budget Office, think tanks like the Tax Foundation and the Tax Policy Center, private modelers, everyone comes 

to the conclusion that the tax cuts will reduce revenues. 

There is, in theory, a growth rate that would be fast enough to 

offset all the revenues. But nobody thinks we are going to be anywhere near that growth rate. 

Mr. PANETTA. In theory, what is that? 

Mr. GALE. It is above four. I am not sure exactly what the right 

number is. But it would be great if we could grow at that rate. But, 

and this comes back to the comments about imagination and the 

anecdotes earlier. The anecdotes are inspiring and we should all, 

you know, be moved by our imagination. But there is no substitute 

for serious analysis. 

Mr. PANETTA. Understood, understood. I guess in discussing 

analysis, I guess the CBO has done, you know, obviously many 

analyses on this. And it has showed that the tax bill, even if it does 

expire on schedule, it will add 1.9 trillion, I think they are saying, 

to the debt by 2028, with interest and growth, obviously. And extending it this year would cost at least, I think, another 1.1 trillion 

through 2029, what they are saying. 

Mr. GALE. Right. 

Mr. PANETTA. In your opinion, Mr. Gale, and if any other witness 

would like to speak to this, can we afford $3 trillion worth of tax 

cuts in this type of strong economy that we are experiencing right 

now? 

Mr. GALE. There are two issues here. One is the size of the tax 

cuts and the second is the allocation of the tax cuts. The size of 

the tax cuts are substantial. It is in the wrong direction as far as 

long-term fiscal sustainability is concerned. But if we had allocated 

the money really well to pressing national needs, then it might 

have been worth it to increase the deficit by that much. 

But TCJA basically says the biggest problem in the country is 

that high-income households do not have enough after-tax income. 

And so, it is allocating an enormous amount of that increase in 

deficits toward high-income households. Now, all of the stuff about 

people buying a car seat or getting a job or getting other benefits, 

those are inspiring and we should be doing that. But this is an incredibly poorly way to target those benefits. We do not have to pay 

off the top 1 percent of the population to give benefits to the bottom 

half. 

Mr. PANETTA. And, I think Ms. Huang, you are shaking your 

head. 

Ms. HUANG. In vehement agreement. And I think the other part 

that Dr. Gale has also talked about is who ends up holding the tab 


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for those tax cuts for the very top. And we have seen over and over 

again in both the statements and the budget proposals of people 

who supported the 2017 tax law that their preferred way of dealing 

with deficits is to cut programs that, you know, on average help 

families of limited means, Medicaid, cuts to job training and assistance, education programs. So that is also another worry that I 

think is part of the picture. 

Mr. PANETTA. Thanks again to all of you. I yield back, Mr. Chairman. Thank you. 

Chairman YARMUTH. I thank the gentleman. I now recognize Mr. 

Crenshaw of Texas for five minutes. 

Mr. CRENSHAW. Thank you, Mr. Chairman. Thank you all for 

being here. I want to thank all our witnesses again. 

And I want to remind everyone what we are really here talking 

about. We are talking about a difference in philosophy. It is not 

just tax rates. It is a question of whether the government should 

be taking more of your money or whether you should keep more of 

your money. It is a difference in the role of government in what 

we believe. 

It seems to me that you all believe that the role of government 

is to tax the people as much as possible so that you and your benevolent fellow academics can dream up more programs for the 

government to spend money on. I don’t believe that. I don’t believe 

that is what the role of government is for. The role of government 

is to protect the God-given rights that we have and to ensure that 

we live as free as possible. 

The role of government is to tax people to the least extent possible while still taxing them enough to cover basic needs for government. And if we are questioning what those needs are, we can 

just look at our Constitution. They are generally pretty clear there. 

So that is what today is about. 

You said that these anecdotes are imaginative. It is literally not 

imagination to bring up anecdotes. It is literally not that. It is reality. So here is some reality from Texas. Direct results from the 

Tax Cuts and Jobs Act. 

McDonald’s increased educational opportunities by $150 million 

as a result of the tax cuts. $500 employee bonuses at Camp Construction Services. Reduced prices for customers at Center Point 

Energy. $500 employee bonuses at Group One Automotive. $1,600 

employee bonuses at Cabot Oil and Gas. $2,000 employee bonuses 

at Waste Management. $1,000 to $4,000 bonuses paid to employees 

at Insperity, totaling 17 million. Base wages raised to $15 an hour 

at Cadence Bancorp along with an increased 401(k) contribution 

and employee stock purchase plan. Covestro had a choice between 

three new facilities, a $1.7 billion facility, between Asia, Europe 

and Houston, so they chose Houston and they say it is directly because of the tax cuts. 

These are not imaginative anecdotes. These are real. You said it, 

so—— 

Mr. GALE. I said the anecdotes were inspiring. 

Mr. CRENSHAW. I did not ask. That is okay, that is okay. 

There is more money in the pockets of the people. That is the reality, okay? Not imagination. 


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Professor Bruckner, again, we are speaking about imaginative 

arguments. You acknowledge that there is a direct benefit of the 

tax cut to people across all incomes but you are claiming that 

women do not benefit as much. Is that correct, yes or no? 

Ms. BRUCKNER. No, I am claiming that we absolutely should 

study this for the first time ever, to determine what the impact is. 

Mr. CRENSHAW. Okay, but would you prefer another tax cut for 

women entrepreneurs? Because we might find some common 

ground there. 

Ms. BRUCKNER. No. What I am saying is we should take a look 

at JCT’s analysis and we should coordinate among our government 

resources to study where the distribution of the income is. Are we 

investing in where there is actual growth and opportunity for 

growth? Are we investing in businesses that will generate more 

economic activity? 

Mr. CRENSHAW. Fair enough. But on the health care issue, you 

took issue with the changes to the individual mandate. What we 

have gone over is that those estimates of people, quote, unquote 

losing their health care, of course, it is not losing your health care, 

you are choosing a different health care plan. Do you not believe 

in giving people that choice? 

Ms. BRUCKNER. I believe in creating schemes that provide a 

pathway for affordable health care for small businesses. It is their 

number one concern. 

Mr. CRENSHAW. Obamacare hurt small businesses, as we know. 

And I just want to point out, the law gives people the choice. They 

are not losing something, they are choosing something else, and I 

have got to move on because I have such limited time. 

Ms. Huang, you took issue with the 20 percent tax cut for small 

businesses. You are claiming that that leads to lower workplace 

standards, that it encourages independent contracting. Do you not 

believe that small businesses also deserved that tax cut? 

Ms. HUANG. So, let’s look into what the definition of a small business is. If you look at where the revenue went—— 

Mr. CRENSHAW. Yes or no? You do not want them to take that 

20 percent tax cut? 

Ms. HUANG. More than two thirds of the tax cut for passthroughs 

went to the top 1 percent. Those are not businesses that I would 

consider small. 

Mr. CRENSHAW. Okay, let’s talk about the 1 percent. What is the 

fraction of total federal revenue the top 1 percent paid? 

Ms. HUANG. What is the fraction of income that the top 1 percent 

gain? 

Mr. CRENSHAW. That is not the question. You cannot answer it? 

All right, well, I will tell you what it is. It is around 37 percent, 

according to recent IRS data. Is that fair? 

We talked about passing the fair test. So, the top 1 percent pays 

more than the bottom 90 percent. Is that fair? And again, we have 

different definitions of fair. 

Ms. HUANG. I don’t think it is fair to cherry pick one type of 

tax—— 

Mr. CRENSHAW. Again, we have—you guys have been cherry 

picking this whole time. 


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Ms. HUANG.——when other people pay payroll taxes, state 

taxes—— 

Mr. CRENSHAW. I am not done. I am not done, because I only 

have 10 seconds left so I am going to use it to make a point here. 

We have different definitions of fair. And that is okay. But I wish 

we were honest about that. You believe fair is proportionality or, 

sorry, I believe fair is proportionality; you believe fair is egalitarianism. We have different approaches to governance and that is 

really what this is about. And I hope we have honest conversations 

in the future. Thank you. 

Chairman YARMUTH. Just to set the record straight, Dr. Gale did 

not use the word imaginative, he called those inspiring. Actually, 

the imaginative came from quoting Mark Twain by Mr. Smith. 

I now recognize Ms. Omar for five minutes. 

Ms. OMAR. Thank you, Chair. 

Ms. Huang, thank you for your forthcoming testimony about the 

impact of the GOP tax cut to the American people. The details you 

shared were very insightful, though the underlying message you 

are sharing should not be a surprise to anyone here. Clearly, the 

2017 tax cuts were just a tool that our Republican colleagues used 

to help make their rich friends richer. 

As you illustrated, everyday working Americans have not seen a 

dollar of the benefits that the Republicans and the Trump administration promised them. So, promise is something that came up 

quite a lot and I want to just go through some of those promises. 

There has not been any meaningful growth, wage growth, as they 

promised. We are not seeing millions of jobs added to the economy 

as a result of the cuts as they promised. We are not seeing a major 

economic boost, certainly not one that offsets the revenue decreases 

we are now facing, as they promised. 

What we are seeing is a record $1 trillion in corporate stock 

buybacks. What we are seeing is major corporations like Amazon, 

a company that is valued at $800 billion, paying exactly zero dollars in taxes. So, what is happening right now is we are paying off, 

as Dr. Gale said, we are paying off the top 1 percent on the backs 

of the rest of us. 

So, these promises have been made. All the while, the American 

workers are trying to balance a skyrocketing health care cost, 

mounting student debt load and impossible high child care costs. 

Where are their benefits and where are their promises? These tax 

cuts are not helping them pay those bills. In many cases, workers 

are seeing their wages go down while everyday cost goes up. 

So, my question to you is, giving everything that you have shared 

in your testimony, does the GOP tax cut do anything to improve 

the lives of everyday working families, families like the ones in 

Minneapolis, families like the ones in everyone’s district that we 

have heard about? 

Ms. HUANG. They are not, in my view, the priority of this tax 

law. I think actually something has gone seriously wrong when you 

have a $1.9 trillion tax bill and there are a single mother with two 

kids working full time minimum wage who gets $75 from this law 

and there are 11 million kids and working families just like her. 

So, to really fix this and prioritize those working families, we 

could have and should have seen a substantial increase in the child 


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tax credit and earned income tax credit for those working families. 

And that should be the first thing that lawmakers prioritize when 

fixing this law. 

Ms. OMAR. Thank you. And my colleague from Texas talked 

about rights earlier. I believe we have a right to breathe clean air, 

we have a right to have access to clean water, we have a right to 

have a planet we can live on. And a lot of my colleagues on the 

other side of the aisle talked about the Green New Deal. The Green 

New Deal is one that has economic growth and opportunity. 

A recent op ed on the Hill called the Green New Deal is Good 

for the Economy states that, while the Green New Deal is not going 

to be cheap, it is pale in comparison to the damage that unchecked 

climate change will inflict on the economy. 

Can you speak to what the costs would be if we are not investing 

in making sure that we have a planet we can live on? 

Mr. GALE. Thank you. The right question about the cost of the 

Green New Deal is compared to what? If we are truly on an existential descent, then we should be doing a lot to try to offset that. 

That does not mean—that is not carte blanche to do anything. We 

should be choosing the most effective interventions and most costeffective interventions. 

But just as the congressman was talking about imagination earlier in respect to the tax cuts, we should be moved by the potential 

to make the planet a cleaner place. Again, that should not substitute for analysis of what works and what is the best way to do 

it. But the goals and the ambition that are laid out I think are exemplary. 

Ms. OMAR. And through taxes and subsidies we could have economic growth and opportunity with the Green New Deal is 

what—— 

Mr. GALE. Again, compared to what? If climate change, you 

know, has increasing costs over time, then mitigating that climate 

change, we should get credit for that in terms of looking at the economic effect. So, yeah, I think there is a positive outcome there. 

Ms. OMAR. Thank you. I yield back. 

Chairman YARMUTH. The gentlelady’s time has expired. I now 

recognize the gentleman from Pennsylvania, Mr. Meuser, for five 

minutes. 

Mr. MEUSER. Thank you, Chairman, very much. And thank you, 

our guests here today, for your testimony. I—first off, I represent 

a district, the PA 9th, where the median income is $43,000. I don’t 

represent the rich. Secondly, as the former revenue secretary for 

the Commonwealth of Pennsylvania, I can assure you that Amazon 

pays a lot of taxes. A lot of tax revenue comes in from Amazon. 

I think earlier, my colleague’s main point that you guys wanted 

to try to minimize was about honesty and trying to get to the truth. 

I think that that would be a honorable baseline to have a good conversation here with the budget committee that understands the 

budget and the numbers. 

So, I am certainly a little confused, call it frustrated, with what 

I am hearing today from my friends on the other side of the aisle. 

What has been wrongly argued as the Tax Cuts and Jobs Act is 

responsible for this current budgetary deficit, first of all, is inaccurate. Right? The number is $150 billion and closing fast, by the 


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way. And it is also inaccurate to say that this was purely a tax cut 

for the wealthy at a cost to the middle class. This could be nothing 

further from the truth. It is simply inaccurate and is not focused 

on reality and facts. 

The facts are middle income taxes were reduced by 3 to 4 percent. The standard deduction doubled. I am not sure if you know 

what that means but $12,000 no longer is taxed of people’s income. 

Small business did receive a 20 percent reduction. Seventy-five percent of the people employed in my district work for small businesses. This was very important. Unemployment nationwide is lowest since 1969 in all demographics. 

Corporate taxes, we want to sit here and beat up on corporations. 

Corporations buy most of the product from small businesses. They 

work together. Our corporate tax, yes, it was reduced to 21 percent. 

However, if you are aware of this, Ireland’s corporate tax rate is 

12.5 percent, the U.K. is 19 percent and Vietnam is 20 percent. We 

have to be competitive. And that is what is creating more investment and more manufacturing in our country, and it is happening. 

And the repatriation, everybody just scoffs at that, it is getting 

near a trillion dollars. It just does not happen overnight. 

So, the goals of the tax cut are real. And, you know, I can’t help 

but shake my head when I hear about all the woes and sorrowfulness of the deficit. You know, we spent eight years where there was 

$9.5 trillion spent and none of my friends on the other side of the 

aisle said a word about it. And, frankly, what do we have to show 

for it? Not much, not much. 

So, thanks to the tax cuts that were signed into the law last year 

by Republicans, not one Democrat voted for it, businesses large and 

small are increasing wages. That data is in, too. They are hiring 

more workers, they are investing in growth. 

There are many, many good American business stories in my district. Every day, I hear from a contractor or a builder or a store 

that tells me that they are doing better. 

Can we do better? Absolutely. That is why I am in Congress, to 

help that effort, to help create a more competitive environment. 

Government’s role is not to create jobs. Government’s role is to 

create an environment where the private sector creates the jobs 

and drives disposable income and overall incomes of the people. 

I want to give an example of one success story in my district. It 

is a company in east-central Pennsylvania by the name of Ashland 

Technologies. I asked them if we could speak on their behalf and 

they were very excited at that prospect, because they are very 

proud of what has been done. Thanks to the tax reform, AshTech 

was able to open a new manufacturing facility, hire 20 new workers and purchase nearly $2 million in new equipment thanks to the 

100 percent depreciation, just in the last couple of years. This is 

an area where unemployment—good paying jobs, we needed impetus such as this. 

So, I have a question for Ms. Pol. Ms. Pol, would you say that 

your business record over the last several years has been similar 

to the one that I referred to as from AshTech, hiring, expanding? 

Ms. POL. Absolutely. 

Mr. MEUSER. That is great to hear. 


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And with my last couple of seconds, can you provide any recommendations as to further tax changes that would benefit a business such as your own? 

Ms. POL. Well, in our business one of the ones that would be 

great is the depreciation on buildings, because I have so many of 

them. You know, it is over 39 years, and that is a long time to depreciate out a building. So that is one that kind of relates to me. 

Mr. MEUSER. Great. Thank you for your testimony. Thank you, 

Chairman. I yield back my time. 

Chairman YARMUTH. Thank you. The gentleman’s time has expired. I now recognize the gentlelady from Illinois, Ms. Schakowsky. 

Ms. SCHAKOWSKY. Thank you, Mr. Chairman. I ask unanimous 

consent for us to put into the record a one-pager from the Center 

on Budget and Policy Priorities called 2017 Tax Law’s Passthrough 

Deduction Could Encourage ‘‘Workplace Fissuring.’’ 

Chairman YARMUTH. Without objection, so ordered. 

[The information follows:] 


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BU00-A363290 with DISTILLERInsert offset folio 46 here 35567.046

Center on 

"' Bud~t 18 and Policy Priot·ities 

2017 Tax Law's Pass-Through Deduction Could 

Encourage "Workplace Fissuring" 

DECEMBER 20. 2018 AT 1245 PM 

BRENDAN DUKE 

TAX POLICY ANALYST 

explains, the 2017 tax law's deduction for 'pass-through'' income may contribute to 

firms obtain the services of workers such as truck drivers or janitors without hiring 

less and in turn contributing to growmg ln their rush to enact the law, 

and Congress ignored that risk to workers. and reason why po!lcymakers should repeal the 

The law provides a 20 percent deduction for certam pass-through income -income that owners of businesses such as 

partnerships, S corporations, and sole propnetorsh1ps report on their indiVIdual tax returns, which previously was taxed at 

the same individual tax rates as the1r wage and salary income. The deduction results in a lower tax rate for certam 

bus1ness owners (including Independent contractors) than for trad1t1onal employees. wh1ch encourages workplace 

fissuring m two bas1c ways 

sexual and 

as health insurance that employers often to 

and employee shares of payroll taxes. Employers also have an 

employees or to understate them relative to the deduct1on so that 

mdependent contractors won't try to negotiate higher pay to make up for them 

Second, the pass-through deduction could further encourage firms to rely more on contracting firms and franchises. 

Consider a lead firm deciding whether to retam its m-house IT department or hire an outside contractor firm to do the 

same work with the same management structure The owner··managers of the contractor f1rm qualify for the pass-through 

deduction, but the 1n~house managers don't The contractor owner-managers can therefore charge the lead firm less while 

doing the same work for the same take~home pay as them-house managers, enticmg the lead firm to choose the 

contractor option 

S1m1larly, a firm may choose not to open a "branch" (where 

'franchise" (in wh1ch the owner-manager owns the establist>n1ilni 

proftts are el1gible for the deduct1on) That way, the f1rm can 

w1thout reducing the owner's afterMtax income 

As for rank-and-file workers. they would remain traditional employees whether 

franch1se or the lead firm. If they worked for the contractor or franchise however. 

results These workers also may have fewer chances 

workers) and instead expand with a 

anginal f1rm, and the remainmg 

owner less than a manager 

are more common at franchise restaurants and hotels franchise-owned fast-food restaurants were 24 percent likelier to 

violate labor laws than those owned directly by the lead firm, and the back wages they owed workers were 50 percent 

higher per violation. found 

The 20171aw's supporters may say that the pass-through deduction's incentives for workplace fissunng encourage 

entrepreneurship, w1th individuals creating more contractor f1rms and openmg more franchises. And, on paper, the 

deduct1on could create a large number of new businesses But that's not the type of entrepreneurship that spurs 
84 


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innovation and job creation - instead, firms would merely be breaking themselves into pieces and creating new types of 

entities to generate tax savings 

In short the new pass-through deduction moves tax policy in the wrong direction. It may push more workers into lowwage firms or put them outside the protections of labor laws, while depressing wages and weakening employer-provided 

benefits and workplace standards. That's one more reason that policymakers should undo this serious policy mistake and 

repeal the pass-through deduction. 
85 

Ms. SCHAKOWSKY. Let me just say to my colleagues, I really do 

not think we ought to get into only you are telling the truth and 

we are not. We may have different interpretations of the data. But 

the idea that somehow, we are not telling the truth, we are not 

dealing with facts, I think is a dangerous place to go and unnecessary. 

The White House Council of Economic Advisers said the 2017 tax 

law would raise the average worker’s wages by $4,000 to $9,000, 

claiming the main wage suppressant over the last 40 years, when 

their economic policies have been enacted, has been international 

competition in terms of low tax rates. 

Instead though, what we have seen are companies investing 

more than $1 trillion in stock buybacks. That is over 130 times the 

$7.1 billion corporations have given workers. 

Dr. Gale, have workers seen $5,000 more, somewhere around 

there, in their paychecks as a result of the Tax Cuts and Jobs Act? 

Mr. GALE. There is certainly no evidence to date that workers’ 

gains have been anything near the 4,000 to 9,000 that the CEA 

claimed would occur. It is unclear from the CEA’s analysis what 

the time frame for their analysis is. But as I noted earlier, CBO 

says that national income will only go up by 0.1 percent after 10 

years because of the tax cut. 

This is facts and analysis, by the way. And it is hard to see how 

wages would go up by the 4,000 to 9,000 above what they would 

have gone up anyway if national income is only going to be 0.1 percent higher than it would have been anyway. 

Ms. SCHAKOWSKY. Does not add up, does it? So, let’s look backward here. Ms. Huang, did the wealth trickle down to workers in 

the form of wage increases after the 2003 Bush tax cut? 

Ms. HUANG. The historical record is pretty poor on that. 

Ms. SCHAKOWSKY. So, Dr. Gale, did the wealth trickle down to 

workers in the form of wage increases after the 2001 Bush tax cut? 

Mr. GALE. The 2001 featured both similar cuts to 2017 income 

tax rates and estate tax rates, and then there was the repatriation 

holiday a couple years ago. Wage growth was fairly slow in that period. You certainly do not see a big boost in worker compensation 

at that point. In particular, in the repatriation, there is strong evidence that firms—if you recall, the law then said that firms could 

not get the tax holiday for the repatriation unless they invested the 

money—they could not get the holiday if they used it for dividends 

and buybacks. But subsequent evidence shows that the firms that 

got the subsidy used it for precisely those reasons, dividends and 

buybacks, rather than job expansion. 

Ms. SCHAKOWSKY. Was that in the law, that they were supposed 

to—— 

Mr. GALE. That was a provision in the law back during the Bush 

administration, yes. Of course, money is fungible, so they basically 

said, well, this money we brought back we are going to pay to 

workers. But this other money which we used to be paying workers, now we are going to pay out to shareholders. 

Ms. SCHAKOWSKY. I see. Ms. Huang, are you aware if the wealth 

trickled down to workers in the form of wage increases after the 

1981 Reagan tax cut? 


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Ms. HUANG. No, and you can look back at many different examples including that one, including the experience in Kansas, and 

there is very little evidence that these tax cuts for high income people and large businesses end up in workers’ wages over time. 

Ms. SCHAKOWSKY. So I guess in general, I am asking both of you 

if there are any examples that you can find that trickle down? That 

is, cutting taxes for the wealthiest Americans has actually improved the lot significantly then, or equally, of ordinary working 

families. Dr. Gale? 

Mr. GALE. Thank you. My reading of the literature is there is an 

enormous amount of evidence, whether it is cross-country evidence 

or historical evidence in the U.S. that says that trickle-down economics falls far, far, far short of what is claimed for it. 

Ms. SCHAKOWSKY. Thank you, I yield back. 

Chairman YARMUTH. The gentlelady’s time has expired. We have 

one more Republican who is on his way back to testify so if the 

ranking member agrees, we will yield to Mr. Sires for his five minutes and then—— 

Mr. WOMACK. Absolutely. 

Chairman YARMUTH. Oh, here is Mr. Burchett. 

Mr. BURCHETT. Go ahead, go ahead. 

Chairman YARMUTH. All right, Mr. Sires, you are recognized for 

five minutes. 

Mr. SIRES. Thank you, Mr. Chairman. And thank you for the witnesses that have been here today. 

Look, I am from New Jersey, a very high-tax state. We probably 

got hit harder than any other state with this tax bill that was 

passed last year. I am very concerned about what is happening in 

terms of the real estate market and how it is impacting the real 

estate market. 

You have people in my—well, my district is across from New 

York City. We get the overflow from New York City. They are high 

wage, they make good salaries, they come to New Jersey and they 

pay a lot of taxes, especially in the real estate market. New Jersey 

benefits greatly from that. 

I am starting to get a lot of questions from these people who are 

making good money, that they are starting to go to their accountant, they are starting to realize that their taxes may be $25,000 

a year, $30,000 a year, and it is capped at 10,000. So, some of 

them, this benefit that they are talking about, it is offset. And then 

we also have a state tax that is also capped. So, I think this tax 

bill stinks, quite frankly, in terms of New Jersey. 

I think this tax bill was put together, they rushed it, they did 

not look at the impact that some of the states were going to have. 

And obviously, it impacted a lot of the blue states. And, quite 

frankly, I think we have to change it. I think it is going to hurt 

the real estate market in New Jersey a great deal after they file 

this year. Because people are starting to realize that they cannot 

write off what they have been writing off in the past. 

And I know some of the Realtors are already making appointments in my office to say this. I have seen it slow down. I talked 

to some of the mayors in my district. They are very concerned 

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ties. They are concerned because they are not going to be able to 

move some of this real estate that is going. 

The district I represent, they called it the Gold Coast, you know, 

Hoboken, that whole area where there is a lot of development, a 

lot of good real estate has been developed. 

So, you know, how do we correct this? Do you think that this tax 

bill aggravated the real estate market in some of these areas? Can 

anybody talk to that? In other words, has aggravated the downturn 

in home sales in certain regions of the country. 

Mr. GALE. It certainly did in a couple of ways. The shift from 

personal exemptions to standard deduction greatly reduced the 

number of people that took the mortgage interest deduction. So, the 

number of people taking that deduction is falling from on the order 

of 26 percent to on the order of 11 percent. I am not sure those figures are exactly right, but it is that type of thing. And that, of 

course, will have ramifications for the value of real estate. The 

state and local tax deduction limitation, as you mentioned, will also 

have a similar effect in the high-tax states. 

So, I mean, this is—I do not want in any way to minimize the 

problem. This is just an example of when you change a lot of 

things, a lot of things change. Some go up, some go down. And it 

seems real estate, charitable giving, health insurance and things 

like that are among the losers in this tax reform. 

Mr. SIRES. Anybody else? 

Ms. BRUCKNER. I think that it is definitely something we should 

measure and study after this first year of tax filing. Let’s get a precise number on whether or not people benefitted with respect to the 

real estate provisions. I think it is something that certainly should 

be flagged for further study. 

Mr. SIRES. Well, some people estimate that as many as 2 million 

people in New Jersey are not going to be able to write, you know, 

the real estate tax above the 10,000 that they were writing before. 

In my district, I have 10 minutes, but what was good about it is 

that people used to come to New Jersey because they realized that 

they could write that off because they made high wages in New 

York and now they can’t. 

Ms. BRUCKNER. I would be worried and interested in looking at 

the data on older people and older people who are still in their 

homes. I think—— 

Mr. SIRES. That, we have not gone into that but, obviously, they 

are impacted greatly. 

Ms. BRUCKNER. And that is something, and there is not data on 

that, but that is something certainly to track. 

Mr. SIRES. Thank you. 

Chairman YARMUTH. The gentleman’s time has expired. I now 

recognize Mr. Burchett of Tennessee for five minutes. 

Mr. BURCHETT. Thank you, Mr. Chairman, ranking member. Everybody is wearing orange today. I want to thank you all so much 

for recognizing the University of Tennessee in our upcoming victory 

of Kentucky this weekend. I just want to make note of that. 

Ms. Bruckner, I am not going to ask you any questions due to 

my collegiate history in accounting, so I am going to stay away 

from you, all right? As I stated many times, I liked first quarter 


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accounting so much, I took it twice and then I pursued a degree 

in education. So, thank you. 

I guess, let’s see, on the screen, Litton’s Restaurant, that is 

owned by my buddy, Barry Litton. He, like my father, he served 

his country in the Marine Corps. He and his son, Eric, and Barry’s 

sister, they just run a great restaurant. If you ever come to Knoxville and get near Fountain City, just ask somebody where Litton’s 

is. It is wonderful, and it is a great restaurant. 

And they have, as they have told me, they have actually seen an 

uptick since the tax break and they are very grateful for it. And 

it is a small business in Knoxville, just like 99 percent of the businesses in Tennessee are. 

And I want to ask Ms. Pol, how do I say that name, Pol? 

Ms. POL. Yes, you are right. 

Mr. BURCHETT. Okay, great. In your opinion, you are the only 

small business owner on the panel, that seems to be correct. How 

has the new tax law helped you? And just give a specific. You 

know, everybody gives these numbers and statistics and, frankly, 

I get lost in all that. I deal with human interest and things like 

that. And thank you for being here, ma’am. 

Ms. POL. Yeah, absolutely, thanks for having me. The biggest 

thing was being able to feel confident to give raises to our employees this past year. We have struggled with that the last few years, 

just due to health care costs. It is one of our major concerns. And 

so, we were able to give every one of our employees a raise. 

And, you know, being able to get money back on the new tax law 

as far as the small business deduction, that has helped us invest. 

We invested in a warehouse, $2 million, and then also doing the 

500,000 to the million dollars allowed us to invest in six new trucks 

that cost a million dollars. And so, we have not been able to do that 

for the last few years. But it gave us confidence going forward. 

Plus, the spark of new businesses and new business that is coming our direction, because of the boost in the economy all the way 

around our area. 

Mr. BURCHETT. Great. Thank you so much for being here, ma’am. 

And is it Mr. Gale or is it Dr. Gale? 

Mr. GALE. It’s doctor. 

Mr. BURCHETT. Doctor? All right, Doctor. You earned it, so I am 

going to call you that. In the energy sector, what type of taxes 

would you support? Would it be a carbon tax, a gasoline tax? And 

if so, what is your justification? And I am not going to jump you, 

I am not going to run for reelection on this. 

Mr. GALE. I think the right approach is the carbon tax, with an 

exemption for low-income households or a rebate for low-income 

households. One of the numbers I came up with recently was that 

we could pay every coal worker $250,000 in severance pay and the 

total cost would be 1 percent of the 10-year revenue of a carbon 

tax. So, the impact on low-income communities is important. The 

impact on coal communities is important. But they are totally solvable situations. 

The advantage of a carbon tax over a gasoline tax is that a carbon tax taxes many forms of carbon emissions, as gasoline is just 

one of them. So as broad a base as possible. A carbon tax, I think, 

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ronment, it would help the fiscal situation and it would fix a big 

imperfection in the way the economy operates, which is right now 

people in businesses that emit carbon are not paying the full social 

cost of that carbon emission. 

Mr. BURCHETT. Are you familiar with—this isn’t in my notes and 

this always makes my folks nervous when I get off track, but I always get off track, so it doesn’t matter. There is a new bill out, 

have you seen it, the one—and I had a group of people in Knoxville 

just last week come to—when you said that, it reminded me that 

they came to see me about that bill. It is a new type of idea that 

actually gives rebates to folks and are you familiar with that legislation? 

Mr. GALE. There was a—I am not sure about the legislation. 

There was an economists’ statement that was signed by a couple 

of dozen Nobel laureates and about 3,000 other people, including 

me, saying that we should do a carbon tax and we should rebate 

the money on a universal basis. That is my second choice. 

I signed it because it would be so much better than what we are 

doing now. My first choice would be we use the revenues for a variety of purposes. But the main issue is to get the carbon tax in 

there. 

Mr. BURCHETT. And I know I am out of time. But do you actually 

trust government with another pool of money, that they will actually do with it what they said they will do? 

Mr. GALE. Compared to what, again? I feel like we have to tax 

carbon and then the question is what to do about it. The paying 

back, the people who want to pay it back mentioned precisely the 

issue that you mentioned, which is they do not trust government 

to use it, so they want to send the money back. I trust government 

more than that. I think we can reduce the debt, we could reform 

taxes, et cetera. 

Mr. BURCHETT. Okay, thank you. 

Chairman YARMUTH. The gentleman’s time has expired. I now 

recognize Ms. Jackson Lee of Texas for five minutes. 

Ms. JACKSON LEE. Chairman and ranking member, thank you 

very much. I have always indicated my appreciation for this committee because of the astuteness of all the witnesses. Let me acknowledge Ms. Pol, who has come a distance to share her story, 

and I think I have most of the facts of her story, and I thank her 

so very much for her testimony. 

But I think it is important for me to set the groundwork very 

quickly to indicate sadly that this GOP tax scam is a failure. It 

raises the nation’s debt by 1.9 trillion at a time when the economy 

was already strong. I lived through the 2009 debacle. In fact, I was 

a part of the discussion when the Secretary of the Treasury came 

late to the Congress to indicate, and that was of course some years 

before, that we were about to see a collapse that we had never seen 

before. That was Secretary Paulson. 

And so, I have seen the trajectory and saw what we needed to 

do, an infusion of capital that many criticized. But the stimulus 

saved a lot. 

So, we are now facing major, long-term budgetary challenges 

driven by our aging population. And rather than devoting resources 

to wise investments in our workers and small businesses, the GOP 


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tax scam further burdens workers, families, endangers Americans’ 

retirement security and worsens our budgetary outlook. 

Mr. Chairman, the verdict is in and none of the GOP tax scam 

promises have borne out. Our long-term economic growth trajectory 

is unchanged. There is no sign of an investment boom. Real wage 

growth for workers remain modest. And factories and jobs are more 

likely to go overseas. The federal deficit is soaring. We have the sequester. And as corporate tax receipts plummet into the government and the tax code is riddled with even more special interest 

tax breaks and loopholes. 

As I quickly asked you a question in testimony before one of our 

committees dealing with pharmaceuticals, question was asked, 

have you taken the tax savings and invested back into research 

which would then help bring down the cost of prescription drugs? 

To my knowledge, let me qualify my recollection, that not one said 

that they had invested those tax benefits to any of us. 

Let me immediately go to Ms. Bruckner in my first question. And 

that is, Professor Bruckner, what do typical women-owned firms 

look like in terms of their type, size, revenues? Did the GOP tax 

law address typical women business owners’ needs in terms of accessing capital and growing their businesses, in particularly women 

of color? 

May I just do this, if your memories are good, may I just go to— 

excuse my papers here—go to, so you can remember, to Ms. Huang. 

Some of my friends across the aisle have already been rehearsing 

their calls to pay for the tax cuts by making cuts to Social Security, 

Medicare, Medicaid. I just came from a Medicare for All presentation. Who will be hurt if we pay for the tax cut that way and 

what would this mean for Americans’ retirement security or their 

access to good health care? 

And to Dr. Gale, are we experiencing a Trump economic boom or 

simply a continuation of the Obama expansion began in 2009. 

I have given you only a few seconds, but I know you are succinct, 

because I need other get all three of you. 

Thank you for all your presence here. 

Ms. BRUCKNER. I think that when we look at the business tax 

expenditures and how they were distributed among women business owners, there is a real question as to whether or not there is 

an equitable distribution, particularly when you measure it in 

terms of the revenue lost. For example, 199A cost $415 billion but 

more than 50 percent of that is going to go to firms that have a 

million or more of revenues but only 1.7 percent of women business 

owners, who are 40 percent of all U.S. businesses, actually have 

revenues of a million dollars or more. That is just one example that 

warrants the specific study of tax expenditures. 

Congress needs to know if where you are investing you are getting a rate of return and women business owners tend to start 

businesses more. 

Ms. JACKSON LEE. Thank you. Quickly, Ms. Huang. 

Ms. HUANG. There is a big risk that low and moderate income 

Americans end up being worse off by this tax law. If the increase 

in deficits from those tax cuts primarily for the wealthy end up in 

underinvestments in basic infrastructure, child care, facing challenges like climate change and of aging population, and in fact we 


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have seen budget proposals from proponents of the tax law that 

would cut supports in housing and health care and in a variety of 

other programs that help Americans achieve shared prosperity. 

Ms. JACKSON LEE. I thank you. Dr. Gale? 

Mr. GALE. All right, I think there are five things that are affecting the economy positively right now. The first, sorry, the first is 

that we have been building on a long economic boom. The second 

is the tax cuts have definitely had a positive stimulus effect in the 

short run. Almost any tax cut that put money in people’s pockets 

would do that. Third, the 2018 spending deal that Congress 

reached has helped boost the economy. Fourth, oil prices have gone 

up and the U.S. is now a net supplier of oil so that helps the economy, whereas it used to hurt the economy. And fifth, the Fed has 

indicated that it is going to ease off on interest rate hikes, which 

also helps the economy. So, the tax cut is part of that, but I would 

not give all credit for everything positive to the tax cut. 

Ms. JACKSON LEE. And it is countered by the deficit that is growing. 

Mr. GALE. That is a longer-term effect. And over time, the stimulative effects of the tax cut will wear out and the long-term effects 

of the deficit will get bigger and that is why CBO predicts that by 

the end of 10 years, there will be virtually no impact on the size 

of the economy. 

Chairman YARMUTH. The gentlelady’s time has expired. 

Ms. JACKSON LEE. Thank you, Mr. Chairman. 

Chairman YARMUTH. So, it is now down to the ranking member 

and me. 

Mr. WOMACK. As it usually is. 

Chairman YARMUTH. It is. The ranking member is recognized for 

10 minutes. 

Mr. WOMACK. I want to thank each of the witnesses that have 

been before us today. And thank you, Mr. Chairman, for having 

this hearing. 

Some of my colleagues on the other side of the aisle and some 

of the witnesses have talked about how the Tax Cuts and Jobs Act 

has led to income inequality. Let’s just review some facts. And if 

these are incorrect, please take issue with them. 

Median household income is at an all-time high. More people 

than ever live in households earning $100,000 or more, fewer 

households earning less than 35,000. Share of income as it pertains 

to the top 5 percent of income earners has remained the same since 

1995. And the share of income as it pertains to the top 20 percent 

of income earners has remained the same since 1995. 

So I struggle with the claims that the Tax Cuts and Jobs Act has 

led to a bigger gap in income inequality. And my thesis going into 

my opening statement was about that Washington, D.C., the federal government, has a spending problem not a revenue problem. 

Revenues are up but spending is up on a much bigger percentage 

of GDP. 

And then I want to go back to what was said earlier, and I think 

it is worth coming back to. And that is that, Dr. Gale, you said that 

you had created some jobs for some contractors. But in terms of 

let’s just say risk, business risk, what risk have you taken? You 

have read a lot of literature but what risks have you taken that 


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give you some inside view, some more than just a theoretical view, 

but what risks have you taken, what jobs have you created that 

give you authority on the subject? 

Mr. GALE. One of the biggest professional risks that I took was 

opting to pursue a Ph.D. That is a long process, it is not always 

a successful process. 

Mr. WOMACK. Did that create any jobs? 

Mr. GALE. You were asking me what risks I have taken. My 

point, if you will let me finish, is there is—— 

Mr. WOMACK. Since I haven’t got a lot of time, let me reclaim my 

time. Have you created any jobs? 

Mr. GALE. Depends what you mean by created jobs. When I 

was—— 

Mr. WOMACK. Have you had to negotiate a health care program? 

Have you turned the key in the door? Have you had to buy equipment and hire people? 

Mr. GALE. When I was the head of the economic studies program 

at the Brookings Institution, from 2006 to 2009, the program tripled in size and we funded that increase. 

Mr. WOMACK. And that was someone else’s money, it wasn’t 

yours? 

Mr. GALE. No, it was not my money. I don’t personally finance 

the Brookings Institution. 

Mr. WOMACK. All right, Ms. Huang, a question for you. What—— 

Mr. GALE. We raised the jobs externally and hired people. 

Mr. WOMACK. How many jobs have you created, Ms. Huang? 

Ms. HUANG. So, I think the premise of the question that you 

are—— 

Mr. WOMACK. It is a real simple premise. How many jobs have 

you created? 

Ms. HUANG. Well, I think it is not so simple to understand—— 

Mr. WOMACK. What health care programs have you negotiated—— 

Ms. HUANG.——that workers—the workers who take home a 

paycheck and work hard—— 

Mr. WOMACK. Let me finish my question, respectfully. All right? 

Ms. HUANG.——for low wages and spend that money are also 

part of what keeps this economy vibrant. 

Mr. WOMACK. Okay. My question is, you are an expert witness 

on the Tax Cuts and Jobs Act, sitting before the Budget Committee 

of the United States House of Representatives. And a member is 

asking how many jobs have you created that gives you more than 

just some kind of academic background on the impact of the Tax 

Cuts and Jobs Act? How many? 

Ms. HUANG. I don’t know. I don’t know when I was—— 

Mr. WOMACK. Have you created any? Have you created any jobs? 

Ms. HUANG. When I was a factory worker, working for minimum 

wage, I don’t know what impact that had throughout the community. 

Mr. WOMACK. Okay, the witness is not cooperating, Mr. Chairman. 

Ms. HUANG. I don’t know when I was advising startup businesses 

what impact that had throughout the economy. 


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Mr. WOMACK. Let’s turn to Ms. Bruckner. Ms. Bruckner you did 

have some kind of a previous background in some kind of a job creation situation, did you now? 

Ms. BRUCKNER. Yes. 

Mr. WOMACK. How many jobs were created? 

Ms. BRUCKNER. I am not a business owner yet. 

Mr. WOMACK. Okay, so I think it is safe to say that, of the panelists here today, and we have four, that of the panelists here today, 

to critique the Tax Cuts and Jobs Act, to put under impeachment, 

if you will, the very premise that the Tax Cuts and Jobs Act is 

working, as evidenced by the fact that unemployment is low, wages 

are higher and we have gone through the whole litany of the benefits of the Tax Cuts and Jobs Act, that 75 percent, three out of the 

four witnesses here today, haven’t created jobs, haven’t negotiated 

a health care contract, haven’t had to deal with signing the front 

of a check as well as the back of a check. These are people that 

spend most of their time in academia, through some kind of a bureaucratic, in some kind of a bureaucratic maze, reading a lot of 

numbers, a lot of literature, writing a lot of articles about it. 

But where the rubber meets the road, the only witness that is 

standing or sitting before this committee today is Ms. Pol from 

Iowa, flyover country. 

Ms. Pol, how many jobs have you created? 

Ms. POL. Currently, we have 54 employees. 

Mr. WOMACK. Fifty-four employees. And where did you start? 

Ms. POL. We started with one, my father. 

Mr. WOMACK. Okay, so and as my friend, Mr. Woodall characterized you, you are a kind of a serial entrepreneur. It dates back into 

years. 

So, Ms. Pol, I would trust that somebody that has actually been 

in the business of creating jobs and opportunity for their people has 

kind of an inside baseball look at what Tax Cut and Jobs Act provisions have done for your business. So would you, just in a matter 

of a few seconds, kind of give me a highlight as to what it was able 

to do for you that you would not have been able to do otherwise? 

Ms. POL. Sure. As I spoke before on, that we spent the million 

dollars. And that helped, to be able to, you know, deduct that immediately, expense it out immediately instead of depreciating it 

out, it really, really helped us tax wise this year. I am in the process of buying my brothers out so I have a huge debt load on myself. 

And when we spent that money, we also borrowed money. And also 

the same way with the warehouse. I am not a wealthy person, you 

know. Even though we have these companies, we give back to the 

community, we give back to our employees. 

And so by doing this, we needed to do it. But it was scary to do 

in our position where we are financially with our company. And so 

having to be able to have these deductions and the help on that 

and to getting some cash flow back into our company kind of revitalized us. 

Mr. WOMACK. Giving you hope? 

Ms. POL. Yes. 

Mr. WOMACK. For the future? 

Ms. POL. Absolutely. 


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Mr. WOMACK. Are you still thinking expansion, thinking of hiring 

more people? 

Ms. POL. Yes, yeah. I am scared of the future, for the fact that 

it is not permanent. That is what scares me going into the next 

generation. 

Mr. WOMACK. But to be fair, I would also say that it is not just 

tax policy. There are a lot of other inputs rather than tax policy, 

cost of energy and, you know, competition for labor and a whole lot 

of other things. But I am going to take it that, in your response, 

you are basically saying that the Tax Cuts and Jobs Act has helped 

you, an individual business owner in small town Iowa actually 

help, help your cause, help your business? 

Ms. POL. Yes, it has. 

Mr. WOMACK. A question for Dr. Gale. CBO Director Keith Hall 

testified before this very committee on a question that I had raised 

about elevating the corporate income tax. Because there is a movement afoot or at least a theory that we need to—we went too far, 

we took it to 21, we cut it 14 points and we need to move it back 

up. My friend right here from the great Commonwealth of Kentucky thinks 28 is the right number. 

Director Hall said that it would lead to the inverse of what we 

have seen in the passage of the TCJA, and that is we would see 

declining growth and employment. 

Do you have concerns about what would happen if, in fact, the 

corporate rate went back the other direction? 

Mr. GALE. I have no interest in disputing what Director Hall 

said. I would emphasize that the issues, the changes to the corporate tax should be not just to the rate but to the base. If we expanded the scope of expensing, we would encourage new investment and hence encourage new jobs. And by raising the rates, we 

would reduce the windfall gains that are currently accruing to people who made investments in the past. 

So, I would encourage something that raised the rate and transformed the base. But I think Director Hall is right, if you just raise 

the rates, you would undo some of the positive effects. 

Mr. WOMACK. All right, quickly, Ms. Huang, and I know I am 

going to be out of time here in a minute. If you follow your Twitter 

feed, it is obvious that you have an interest in a lot of things that 

involve spending a lot more money. So maybe the basis for your arguments about Tax Cuts and Jobs Act not working is the fact that 

allowing more people to keep more of their money prevents the government from having more of their money, which allows the government to provide more things. And you are big on a wealth tax, 

are you not? 

Ms. HUANG. I think that there is a lot of room and a lot of different ways to raise progressive revenues to meet the fiscal challenges that face this country. 

Mr. WOMACK. You like the wealth tax, don’t you? 

Ms. HUANG. I like a lot of different approaches. 

Mr. WOMACK. What about the Green New Deal? 

Ms. HUANG. I don’t know the details. 

Mr. WOMACK. What about free college? 

Ms. HUANG. I don’t know the details of that, either. 


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Mr. WOMACK. What do you think about policies about work requirements for people that are on the social safety net program 

that are not employed, that are single people without dependents 

and able bodied? What do you think about that policy? 

Ms. HUANG. Many people who are beneficiaries of Medicaid and 

food stamps are, in fact, workers. And those social safety nets—— 

Mr. WOMACK. Those that are not? 

Ms. HUANG.——are actually very important because they help 

people over time do well in their homes and in their communities 

and be able to work. So I think it is actually really counterproductive to require—— 

Mr. WOMACK. I am out of time. 

Ms. HUANG.——paperwork tests that would increase the number 

of bureaucratic hoops that they would have to go through to get 

that basic assistance. 

Mr. WOMACK. I appreciate the witnesses. Thank you. 

Chairman YARMUTH. I thank the gentleman. 

I now yield myself 10 minutes and begin by saying that the ranking member is truly a friend and I have great respect for him, as 

I do for all the members. And the strategy here from the other side 

has been very clear. It has been to try and discredit experts who 

have spent years doing research and analysis of very important 

topics and to hold up individual examples of business people for 

whom the tax cuts have been helpful. And we understand, obviously, that the tax cuts have helped some people. 

My college classmate, Steve Schwarzman, who is the chairman 

and founder of the Blackstone Group, was helped substantially by 

the tax cuts. He made $700-plus million last year and I am sure 

he is very happy with the tax act of 2017. 

I started several businesses. I unlocked the door, I negotiated 

health care contracts, I worried about who was making payroll. I 

was always the last one paid. My brothers and sister and my father 

all were entrepreneurs. 

I don’t think any of them, possibly my father, but I don’t think 

any of the four of us siblings who have started businesses and run 

businesses would have ever said we are the definitive answer to 

the impact across the country of a certain policy of the federal government. I never would have been as presumptuous to say, because 

a policy had certain impact on me, that I know what the impact 

on the federal budget was. And that is, of course, what the purpose 

of this hearing is, is to determine what the impact of the tax cut 

has been and will be on the federal budget. 

So, let’s focus on that for a second. And there seems to be a substantial difference in a very important question in relation to what 

the impact on the budget is. Republicans say, and I am not disputing that they are wrong, that revenues have never been higher 

for the federal government as they have been since the tax cut was 

passed. We Democrats say, and some of you in your testimony have 

said, revenues have been hurt by the tax cut and will continue to 

be hurt by the tax cut. 

How do you reconcile those two, assuming they are both true? 

And I actually do believe they are true. 

Dr. Gale, would you like to reconcile that? 


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Mr. GALE. Yet again, it is a compared-to-what question. Revenues would be higher if we had not passed the tax cut. That seems 

like a very clear conclusion from everything CBO and JCT do. And 

I am sure when Director Hall testified on that, that that was an 

implication of his testimony. 

But, you know, the economy grows over time. There are more 

people. So, there is more productivity. So, you know, there is a natural upward trend in the level of revenues. That trend was simply 

displaced somewhat by the tax cuts. 

Chairman YARMUTH. Ms. Huang, do you want to answer? 

Ms. HUANG. As a share of the economy, which is really what the 

nation can afford in terms of its resources, revenues as a share of 

the economy are at its lowest level in 50 years outside of a recession. 

Chairman YARMUTH. And the fundamental conclusion or estimate of CBO that the tax cut specifically is going to be responsible 

for an additional $1.9 trillion worth of debt over 10 years, assuming the law stays as it is and the higher amount, if we extend the 

expiring tax cuts, that has not changed, right? 

Ms. HUANG. Not that I am aware of. And in fact, the 1.9 trillion, 

there was a question earlier, the 1.5 was the initial estimate, the 

1.9 is the re-estimate based on later data in terms of how much it 

will cost. 

Chairman YARMUTH. Mr. Womack talked about how, and again 

I have no reason to dispute this, that income levels have not substantially changed in terms of percentages over the last decade or 

so. What about wealth? I did not hear him talk about how wealth 

has changed, the disparity in wealth over the last decade or so. 

Mr. GALE. Both income and wealth have become more unequally 

distributed in gradual processes over the last 40 years. The sources 

of the widening distribution have changed over time, but the trends 

are evident. The wealth trends are even starker than the income 

trends in terms of how much has been concentrated in the top 0.1 

percent, 1 percent, et cetera. 

Chairman YARMUTH. Getting back again to a question of, not so 

much impact on the budget, although all of this has an impact on 

the budget, but we talked about the question of fairness early on. 

I believe Mr. Crenshaw was talking about fairness. 

And one of the things that occurs to me is that we have a fundamental issue, philosophy, as to whether we tax rental income or 

productive workers’ income differently or similarly. Does anybody 

want to address that? You know, I am looking at these enormous 

incomes that we are seeing and many of those people are in the 

top 0.1 percent, who derive such a huge benefit from this tax cut. 

And it seems to me that many of those incomes are derived from 

essentially rental, what is referred to as rental income. They are 

basically not doing anything on a daily basis, they are getting royalties, they are getting dividends and so forth. 

Dr. Gale? 

Mr. GALE. Thank you. Perhaps the primary with the Section 

199A, the passthrough provisions, is that it taxes business income 

at a lower level than wage income. That gives people incentives to 

shift wage income to business income, which is an obvious form of 

tax shelter. It gives businesses incentives to either divide or comVerDate Mar 15 2010 09:20 May 29, 2019 Jkt 000000 PO 00000 Frm 00100 Fmt 6633 Sfmt 6633 T:\FY 2020\COMMITTEE REPORTS\HEARING REPORTS\2.27.19 2017 TAX LAW IMPACT

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bine to take advantage of the odd limits in the bill. It is incredibly 

complex. 

You know, these are concerns with the provision. There is no 

doubt that particular small businesses have gained from it, they 

got a tax cut. The question is, is it a well-designed tax policy? And 

by every principle we know of well-designed tax policy, the answer 

is, no. 

Chairman YARMUTH. Is there any justification you can think of 

to maintain the carried interest tax rate, which President Trump 

claimed that he was going to do away with but, unfortunately, from 

my perspective, is still part of the law after the 2017 act? 

Mr. GALE. I think it is pretty clear that carried interest should 

be taxed as labor income, not as capital gains. But in terms of taxing wealthy households and raising revenues, there is actually not 

much money in carried interest. There is much more money in 

wealth tax, taxing capital gains at death, undoing the 199 features 

and so on. 

Chairman YARMUTH. One final question, and I am really struck, 

Ms. Bruckner, by the amount of small businesses, the number of 

small businesses generating, and probably these are all new small 

businesses, growing small businesses—young, is that the word?— 

small amounts of income, and the lack of capital that they are dealing with. Isn’t one of the issues here, the fact that, very few businesses, big businesses, got the corporate tax rate? By the way, I am 

not necessarily saying 28 percent is the right number. I said, 

Obama was willing to go to 28 percent when the corporate tax rate 

was 35. I think we could afford some additional taxes, 28 may or 

may not be the right number. 

But anyway, one of the things I have heard is there is so much 

cash in the economy right now, in corporations, they have so much 

liquidity that giving them more was not going to make them invest 

because if they had opportunities to invest in productive activities, 

additional ones, they would have had the money to do that. At the 

same time, we have this problem, we had so many young small 

businesses not being able to have access, and this tax cut did nothing to help them. Is that kind of a fair reading of where we are? 

Ms. BRUCKNER. I think with respect to small businesses, the 

quickest and most efficient place that you can get any kind of equity infusion is from your profits. And one other way that you can 

do that is from lower taxes. 

I don’t think there is a question that most businesses got some 

sort of tax cut, right? The bill was designed that way. But when 

we are looking at questions of equity and fairness, are we looking 

at we need to request questions about did we create lower taxes for 

the businesses who needed it most versus for the businesses that 

might have been otherwise just as profitable? 

And I think the question really is, with larger businesses, you 

are seeing lots of share buybacks, which is a way to increase shareholder value without having to actually pay dividends, which is a 

lower tax kind of strategy. Versus, you know, very, very small businesses that are desperate for access to capital, have trouble securing outside financing and might have needed a greater share of tax 

breaks. I am not saying that tax breaks are bad, I am saying we 

should be investing tax breaks where we think, and we should 


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98 

study where they think that we are going to have the most bang 

for our buck. And we have not been doing that. 

Chairman YARMUTH. Well, that concludes our hearing. I want to 

thank all of the panelists for all of your testimony. Thank you for 

traveling so far, Ms. Pol, we appreciate you being here. 

Please be advised, members can submit written questions to be 

answered later in writing. Those questions and your answers will 

be made part of the formal hearing record. Any members who wish 

to submit questions for the record may do so within seven days. 

I thank the ranking member once again. And, without objection, 

this hearing is adjourned. 

[Whereupon, at 12:38 p.m., the Committee was adjourned.] 


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National Tax Journal, December 2018, 71 (4), 589-612 https://doi.org/1 0.1731 O/ntj.2018.4.01 

A PRELIMINARY ASSESSMENT OF 

THE TAX CUTS AND JOBS ACT OF 2017 

William Gale, Hilary Gelfond, Aaron Krupkin, 

Mark J. Mazur, and Eric Toder 

The Tax Cuts and Jobs Act of2017 was the largest tax overhaul since 1986. Our 

assessment - based on a variety of sources - suggests that the act will do the 

following: stimulate the economy in the near term but have small impacts on longterm growth; reduce federal revenues; make the distribution of after-tax income 

less equal; simplifY taxes in some ways but create new complexity and compliance 

issues in others; and reduce health insurance coverage and charitable contributions. Its ultimate effects will depend on how other countries, the Federal Reserve 

Board, and future Congresses respond. 

Keywolr/s: TaxCtlt$tmiL'Jobs4ct. t(O&.CJIIS, ecofi()(Bic growth, distributional effects 

JEL Codes: H2, Ill, H6, H8 

I. INTRODUCTION 

n December 22, 2017, President Donald Trump signed into law the biggest tax 

overhaul since the Tax Reform Act of 1986. This paper summarizes the provisions of the law commonly referred to as the Tax Cuts and Jobs Act (TCJA)- and 

provides a preliminary assessment of its effects, largely based on existing analysis. 1 

The new tax law makes substantial changes to the rates and bases ofboth the individual 

and corporate income taxes, most prominently cutting the maximum corporate income 

tax rate from 35 to 21 percent, redesigning international tax rules, and providing a deduction for pass-through income. Other major changes include the following: expensing 

1 This paper is a condensed version of Gale et al. (2018). For related work, see Chalk, Keen, and Perry 

(2018), Harris and Looney (2018), and Slemrod (forthcoming). 

William Gale: Brookings Institution and Tax Policy Center, Washington, DC, USA (WGale@Brookings.edu) 

HilaryGelfond: Brookings Institution and Tax Policy Center, Washington, DC, USA (Hilary.Gelfond@gmail.com) 

Aaron Krupkin: Brookings Institution and Tax Policy Center, Washington, DC, USA (AKrupkin@Brookings.edu) 

Mark J. Mazur: Urban Institute and Tax Policy Center, Washington, DC, USA (MMazur@Urban.org) 

Eric Toder: Urban Institute and Tax Policy Center, Washington, DC, USA (EToder@Urban.org) 
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of equipment investment; elimination of personal and dependent exemptions, the tax 

on people who do not obtain adequate health insurance coverage, and the corporate 

alternative minimum tax (AMT); and increases in the standard deduction, the estate tax 

exemption, and the individual AMT exemption. Almost all of the individual income 

tax and estate tax provisions expire after 2025, while most of the corporate income tax 

provisions are permanent. 

As a large, deficit-financed tax cut, the TCJA will stimulate the economy in the near 

term, but most models indicate that the long-term impact on gross domestic product 

(G DP) will be small. The impact will be smaller on gross national product (GNP) than on 

GOP because the law will lead to net capital inflows from abroad to finance investment 

that will pay returns to foreign residents. The new law will reduce federal revenues by 

significant amounts, even after allowing for increased economic growth. It will make 

the distribution of after-tax income more unequal. If it is not financed with concurrent 

spending cuts or other tax increases, the TCJA will raise federal debt and impose fiscal 

burdens on future generations. When the TCJA is eventually financed with spending 

cuts or other tax increases, the combination will, under the most plausible scenarios, 

end up making most households worse off than if the TCJA had not been enacted. The 

new law simplifies taxes in some ways but creates new complexity and compliance 

issues in others. It will lead to higher health insurance premiums and reduce health 

insurance coverage. It will adversely affect many sectors, including healthcare and 

charitable organizations. 

Section II discusses the main features of the new law. Sections III, IV, and V discuss 

the impact on the federal budget, economic growth, and income distribution. Section 

VI discusses the effect on complexity and compliance. Section VII considers effects 

on the states; on the healthcare, charitable giving, and housing sectors; and on the trade 

deficit. Section VIII discusses a number of uncertainties raised by the new law. Section 

IX concludes. 

II. DESCRIPTION OF TCJA PROVISIONS 

A. Individual Income and Estate Tax 

The TCJA reduces marginal statutory tax rates at almost all levels of taxable income 

and shifts the thresholds for several income tax brackets (Figure I). The top marginal rate 

falls from 39.6 to 37 percent. The remaining rates are 10, 12, 22, 24, 32, and 35 percent. 

The TCJA repeals personal and dependent exemptions. In place of these provisions, 

the TCJA increases the child tax credit in several ways, creates a new $500 tax credit 

for dependents not eligible for the child tax credit, and almost doubles the standard 

deduction (and indexes it for inflation), raising it from $13,000 to $24,000 for married 

couples filing jointly, $6,500 to $12,000 for single filers, and $9,500 to $18,000 for 

heads of households. 

The TCJA limits the itemized deduction for all state and local taxes to $10,000, for 

both single and joint filers, and does not index that limit for inflation. For taxpayers 
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A Preliminary Assessment of the Tax Cuts and Jobs Act of 2017 591 

Figure 1 

Marginal Tax Rate by Taxable Income 

,..--~ 

I 

~- ---- -- I _____ I 

l 

Priorlaw,2018 I 

I 

I I 

I 

I 

- - ____ I 

I 

- --J TCJA 

r---1 

___ I ,.~ 

-

$200,000 $400,000 $600,000 

Taxable Income 

taking new mortgages, the TCJA limits deductibility to interest on the first $750,000 of 

loan principal on primary and secondary residences and eliminates the deductibility of 

interest for home equity debt. For 2017 and 2018, the TCJA allows a deduction for outof-pocket medical expenses above 7.5 percent of adjusted gross income (AGI). After 

2018, the prior law 10 percent of AGI threshold applies. The TCJA repeals the phasedown 

ofthe amount of allowable itemized deductions (Pease provision). Starting in 2019, the 

TCJA sets the Affordable Care Act's (ACA's) individual mandate penalty tax to zero.2 

The TCJAretains the 0, 15, and20 percent preferential tax rates on long-term capital 

gains and qualified dividends and the 3.8 percent net investment income tax (NUT). 

Unlike prior law, the TCJA sets the tax brackets for capital gains and dividends based 

on taxable income rather than on the tax rate on ordinary income. The TCJA raises the 

exemption in the individual AMT to $109,400 for taxpayers filing joint returns ($70,300 

for singles) and raises the phase-out threshold to $1,000,000 for joint filers ($500,000 

for singles). The exemption and phase-out thresholds are indexed for inflation. 

2 Because the bill was passed via reconciliation procedures, under which only provisions that directly change 

revenues or outlays are permitted, the bill could not repeal the mandate, but instead set the penalty tax rate 

to zero (Committee for a Responsible Federal Budget, 2016). 
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The TCJA changes the measure used for inflation indexing, from the CPI-U to the 

chained CPI-U. The chained CPI-U more accurately measures changes in consumer 

welfare resulting from price changes than the traditional CPI-U.3 

The TCJA introduces a new deduction for income from pass-through business entities 

(sole proprietorships, partnerships, limited liability companies, and S corporations). 

Joint filers with taxable income below $315,000 ($157,500 for singles) can receive a20 

percent deduction of their qualified business income (QBI), regardless of business type. 

At higher income levels, the size of the deduction for QBI depends on the taxpayer's 

income, business type, and the wages paid and property owned by the business. (For 

further details of how this provision works, see Gale and Krupkin, 2018.) In general, 

pass-through businesses, such as corporate income taxpayers, will be subject to the 

TCJA's changes to the business tax base-including both income and deduction items. 

The TCJA doubles the estate tax exemption to $11.2 million for single filers and 

$22.4 million for couples and continues to index the exemption levels for inflation. 

Congress chose to allow most individual income tax and estate tax provisions to expire 

at or before the end of2025 to meet the constraint on the 10-year revenue loss in the 

Congressional Budget Resolution and to comply with Senate budget rules that require 

no increase in the federal budget deficit after the 1Oth year. A few provisions do not 

sunset: the zeroing out of the ACA individual mandate penalty, the change in inflation 

indexing, and changes in the tax base for measuring business income (other than the 

pass-through deduction). 

B. Corporate Income Tax 

The TCJA reduces the top federal corporate income tax rate from 35 to 21 percent.4 

It eliminates the graduated corporate rate schedule and repeals the corporate AMT. The 

TCJA allows for 100 percent bonus depreciation (full expensing) for qualified property for five years, phasing out by 20 percentage points per year starting in 2023. The 

TCJA doubles the small business (section 179) expensing limit to $1,000,000 (with a 

$2,500,000 phase-out threshold) for qualified property. Several provisions of the TCJA 

broaden the tax base for measuring business income. These include limits on business 

deductions for net interest and net operating losses; elimination of the domestic production activities deduction; and, beginning in 2022, five-year amortization for research 

and experimentation expenditures instead of expensing. 

The TCJA made sweeping changes to the treatment of foreign source income and 

international financial flows. Under prior law, the United States taxed the active income 

of multinational firms on a worldwide basis, less a credit for foreign income taxes paid, 

with U.S. taxes deferred until the income was distributed to the U.S. parent company. 

3 As a result, the chained CPI-U rises more slowly than the traditional CPI-U, implying that individuals will 

end up in higher tax brackets and that indexed tax credits (like the EITC) will increase at slower rates than 

under the old indexing system. 4 This change brings the U.S. rate more in line with most other OECD countries. 
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The TCJA created a modified territorial tax system. U.S. corporations continue to owe 

U.S. taxes on the profits they earn in the United States. However, the TCJA exempts 

from taxation the dividends that domestic corporations receive from foreign corporations in which they own at least a 10 percent stake. Under a pure territorial system, 

firms would have a strong incentive to shift real investment and reported income to 

Jow-taxjurisdictions overseas and to shift deductions into the United States. The TCJA 

contains several provisions to reduce the extent to which companies take those actions. 

First, the TCJA imposes a 10.5 percent minimum tax without deferral on global 

intangible low-taxed income (GILTI)- defined as profits earned abroad that exceed 

I 0 percent of the adjusted basis in tangible property. Companies can use 80 percent of 

their foreign tax credits, calculated on a worldwide basis, to offset this minimum tax, 

making the GILTI provision applicable for foreign tax rates less than 13.125 percent. 

The GILTI tax rate increases from 10.5 to 13.125 percent for tax years 2026 and later. 

Second, the TCJA provides a deduction for foreign-derived intangible income (FDII) 

to encourage firms to hold intangible assets in their U.S. affiliates. FDII is income 

received from exporting products whose intangible assets are held in the United States. 

After application of this new deduction, FDII is taxed at a rate of 13.125 percent 

through 2025 and 16.406 percent thereafter instead of the 21 percent rate applied to 

other domestic profits. 

Third, the TCJA imposes a new base erosion and anti-abuse tax (BEAT) at a 10.5 

percent rate on the sum of the corporation's taxable income plus deductible payments 

(excluding costs of goods sold) made to foreign affiliates. 5 Corporations pay the larger 

of the regular tax or BEAT, which limits the ability of both foreign-resident and U.S.-

resident multinationals to shift profits out of their U.S. affiliates. 

To transition to the new system, the TCJA created a new "deemed repatriation" tax 

for previously accumulated and untaxed earnings of foreign subsidiaries of U.S. firms 

equal to 15.5 percent for cash and 8 percent for illiquid assets. Companies have eight 

years to pay the tax, with a back-loaded minimum payment schedule specified in the 

Jaw. The Joint Committee on Taxation estimated that U.S. companies held more than 

$2.6 trillion in untaxed income in their foreign affiliates in 2015 (JCT, 2016). 

C. Excise Tax Changes 

The TCJA cuts taxes for most alcohol producers by reducing the excise tax on the 

first 60,000 barrels of beer produced by a seller from $7 to $3.50, reducing the excise 

tax on the first 100,000 proof gallons of distilled spirits from $13.50 to $2.70, and 

reducing the excise tax on the first 30,000 gallons of most wine from $0.17 to $0.07. 

These changes expire after 20 19. 

5 The tax is only levied on corporations with average annual gross receipts of at least $500 million and those 

that have made related party deductible payments exceeding 3 percent of the corporation's total deductions 

for that year. For this purpose, regular corporate tax liability is post-foreign tax credit but pre-research and 

experimentation tax credit. 
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Ill. FISCAL EFFECTS 

The Congressional Budget Office (CBO, 20 18a) estimates that the TCJA will increase 

the primary budget deficit by $1.8 trillion through 2028 and unified deficits (including 

interest payments) by $2.3 trillion. These estimates consider many behavioral responses, 

but they hold macroeconomic aggregates fixed. The CBO's dynamic revenue estimates 

(including macroeconomic feedback effects) predict that the law will raise primary 

deficits by $1.3 trillion through 2028 and unified deficits by $1.9 trillion. Including the 

macroeconomic effects, the debt-to-GDP ratio would rise by 6.2 percentage points by 

2028 relative to a pre-TCJA baseline, assuming the temporary provisions in the TCJA 

expire as scheduled. 

If lawmakers extended all of the temporary provisions in the legislation, the CBO 

estimates that primary deficits would rise by $2.6 trillion through 2028 and unified 

deficits would rise by $3 .I trillion. In 2028, the last year of the most recent budget 

projection, the debt-to-GDP ratio would be higher by 10.6 percentage points relative 

to a pre-TCJA baseline (excluding macroeconomic feedback) and the primary deficit 

would be higher by l percent of G DP. 

IV. ECONOMIC EFFECTS 

A. Background 

In the short run, tax cuts can raise GDP by increasing aggregate demand. This raises 

the size of the economy relative to potential output but does not expand potential output (because potential GDP is based on aggregate labor supply, the capital stock, and 

the productivity oflabor, none of which changes very much with respect to short-term 

changes in tax policy).6 With the economy currently close to full employment, the impact 

on output of increased demand is much smaller than when there is a lot of slack in the 

economy. As the economy reaches its capacity, increased demand will lead to increased 

inflation, or the Federal Reserve will dampen demand by raising interest rates. 

In the longer run, tax cuts can raise potential GDP by increasing incentives to work, 

save, and invest, thereby raising the productive capacity of the economy. These supplyside effects could lead to faster economic growth in the short and medium terms and a 

permanently higher level of output in the long run. 

The Tax Policy Center (TPC) and CBO estimate that the effect on labor supply from 

the TCJA will be positive due to somewhat lower marginal income tax rates on labor 

income (CBO, 2018a; TPC, 2017). Increases in investment raise output gradually as 

the capital stock increases, as does capital per worker, and these changes raise labor 

productivity and, eventually, wages. Some provisions of the TCJA- such as reductions in tax rates on corporate and pass-through income and expensing of equipment 

6 Some economists argue that potential GOP depends on the path of actual GOP (DeLong and Summers, 

2012). 
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A Preliminary Assessment of the Tax Cuts and Jobs Act of 2017 595 

investment- will raise after-tax investment returns. Other provisions-such as limits 

on uses of business losses, interest deductions, and the amortization of research and 

development expenses- can reduce after-tax returns. On balance, the new provisions 

in the TCJA are expected to reduce the pre-tax return companies must earn to make 

an investment profitable; thus, they should raise investment. However, the effects may 

differ dramatically across assets and industries, given the complexity and potential 

interactions of some of the new provisions (CBO, 2018a; TPC, 2017). 

In the short run, lower corporate tax rates mainly subsidize the return to previously made investments. These gains benefit existing shareholders, including foreign 

shareholders, but do little to raise incentives to invest. This is particularly true when 

investments can be expensed- the treatment given to equipment purchases under the 

TCJA. With expensing, the effective tax rate is zero for marginal investments that are 

completely equity financed and negative for partially debt-financed investments. In fact, 

with expensing, a lower corporate tax rate raises the cost of debt-financed investments 

because it reduces the value of interest deductions. 

Increases in investment can be financed with increased saving by the government or 

the private sector, or with higher net capital inflows from abroad. The TCJA will reduce 

public saving, i.e., increase the federal budget deficit. Domestic saving is relatively 

unresponsive to changes in its after-tax rate of return, and the TCJA does not provide 

new incentives to save.7 As a result, most of the increase in investment will be financed 

by increased capital inflows from abroad. The CBO estimates that, by 2028, after the 

individual income tax cuts - and their associated positive effect on labor supply -

expire and incremental output increases occur almost entirely from a higher capital 

stock, 71 percent of the increased income from higher U.S. GDP will flow to foreign 

residents (CBO, 2018a, 2018c). 

This highlights a critical distinction between GDP, the output ofthe U.S. economy, and 

GNP, the income of Americans. GNP is equal to GDP plus the income that Americans 

earn from overseas investments less the income that foreigners earn from investment in 

the United States. GNP, therefore, is a better measure than GDP ofthe resources available 

to Americans. When domestic output is produced by capital owned by foreign investors, 

the capital income that accrues to investors is part ofGDP but not part of GNP. As shown 

below, the TCJA's medium-term effect on GNP is considerably less than its impact on GDP. 

The international provisions may also affect growth. The BEAT imposes taxes on 

inter-company transactions related to production inputs, rather than profits, and it can 

disrupt global supply chains. This can dampen economic activity. By taxing foreign 

returns in excess of lO percent offoreign physical assets on a current basis, GILTI acts 

like a minimum tax on these sources of income. Accordingly, GILTI creates incentives 

that may more closely approximate a worldwide tax system than a territorial system. It 

also creates incentives, in certain cases, for firms to move tangible assets offshore because 

the first 10 percent of returns on investments in tangible assets in foreign countries is 

7 The corporate tax rate cut may reduce corporate pension contributions (Gaertner, Lynch, and Vernon, 

20 18), which would reduce private saving. 
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exempt from U.S. tax both when earned and when repatriated. This also could dampen 

U.S. economic activity by reducing domestic investment. Last, these provisions may 

interact in complicated ways that could raise effective tax rates for U.S. multinational 

firms (Desai, 2018; Sullivan 2018a, 2018b). 

Finally, the deemed repatriation provisions-which allow firms to "bring back" funds 

previously accrued in foreign subsidiaries at a reduced tax rate- are likely to only have 

small effects on growth. Repatriation refers to the need to recognize the funds for U.S. 

tax purposes before making the resources available to the parent firm for domestic capital 

investment, dividend payments, or share repurchases. The cash that firms repatriate will 

probably not do much to spur growth or create jobs because much of the previously 

accumulated foreign profits are, in fact, already held in U.S. banks that could lend to 

participants in the U.S. economy, or held in domestic securities. Prior evidence on the 

effect repatriated earnings can have on economic activity suggests a limited domestic 

impact. After the 2004 temporary repatriation tax holiday, firms that repatriated funds 

often used these resources to buy back stock and pay dividends to shareholders and 

did not, on average, boost their domestic investment or increase domestic employment 

(Dharmapala, Foley, and Forbes, 20ll; Gale and Harris, 2011; Looney, 2017c). 

B. ESTIMATED EFFECTS 

In the short term, many studies find that the TCJA will raise GDP in the United States, 

with most of the estimates ranging between 0.3 and 0.9 percent, on average, over the first 

three years (Table 1).8 In the next several years, the general pattern is that GDP will be 

larger than it would have been otherwise, but the effect then declines as expensing is phased 

out, the individual income tax cuts expire, and selected business tax increases take effect. 

Most estimates suggest that the economy will be larger by between 0.3 and 0.7 percent 

over the next decade. There is expected to be some positive effect on output from increases 

in labor supply and investment, but these gains are partially offset by the crowding out of 

investment caused by higher interest rates associated with larger federal budget deficits. 

By 2027, most estimates show the TCJA increases GDP by between 0.1 and 1.1 percent. 

Importantly, the CBO projects that, while GDP will be 0.5 percent higher in 2028 

than it otherwise would have been, GNP will only be 0.1 percent higher (CBO, 20 18a). 

This difference reflects the important role of capital inflows and the resulting payments 

to foreign investors for the capital provided, discussed above. Additionally, GDP will 

increase more than GNP because some income currently reported as offshore earnings 

will now be reported as domestic profits due to the changed tax incentives for allocating 

profits from intangible assets.9 

8 Barro and Furman (20 18), CBO (20 18a), International Monetary Fund (20 18), Mertens (20 18), Zandi 

(20 17), University of Pennsylvania (20 17), Tax Foundation Staff (20 17), and Page et al. (20 17). 9 Defining net national product (NNP) as GNP less depreciation of the capital stock and noting that the TCJA 

will raise investment over the decade raises the possibility that the change in NNP may well be zero or 

negative relative to pre-TCJA law (Page and Gale, 2018). 

BU00-A363290 with DISTILLER

TCJA, As Written 

Barro and Furman (with crowd out) 

Congressional Budget Office 

International Monetary Fund 

Mertens 

Moody's 

Penn-Wharton Budget Model (low return) 

Penn-Wharton Budget Model (high return) 

Tax Foundation 

TPC 

TCJA, Extended 

Barro and Furman (with crowd out) 

1 All figures are approximations. 

2 Dynamic revenue effects do not incorporate crowd out. 

3 Primary deficit effect. 

Table 1 

TCJA Growth Effects 

Effect on Size ofGDP (%) 1 

2018-2020 2018-2027 

NA NA 

0.6 0.7 

0.8 0.6 

0.3-2.4 NA 

0.4 0.3 

NA NA 

NA NA 

0.9 2.1 

0.7 0.5 

NA NA 

I 0-Year Dynamic 

Revenue 

2027 Feedback(%) 

0.2 16.72 

0.6 31.03 

-0.1 NA 

NA NA 

0.4 NA 

0.6 7.7 

1.1 19.1 

2.9 69.5 

0.0 12.8 

l.O 20.52 

Sources: Barro and Furman (20 18); CBO (20 18a); International Monetary Fund (20 18); Mertens (20 18); Zandi (20 17); University of Pennsylvania (20 1

Tax Foundation Staff(2017); Page et al. (2017). 
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All the estimates above analyze the tax cut as it was legislated, with temporary provisions expiring as scheduled. If, instead, the temporary provisions are extended, and the 

scheduled increases in some corporate provisions are not allowed to take effect, Barro 

and Furman (20 18) estimate that the economy would be 1.0 percent larger in 2027 than 

it would have been relative to a baseline that assumes pre-TCJA law holds, meaning 

that expiring provisions in prior law would have been allowed to expire as scheduled 

(including crowd out effects of government debt). That baseline seems most appropriate 

for the estimates that examine the TCJA as written because it compares the actual new 

law with the actual old law. However, for analysis that assumes the temporary TCJA 

provisions are made permanent- presumably because policymakers routinely extend 

temporary provisions-the more appropriate baseline would be to consider pre-TCJA 

law with the temporary provisions that existed then also extended. Barro and Furman 

(20 18) suggest that, under this alternative baseline, GDP in the 1Oth year would be about 

0.3 percent larger than under a baseline using pre-TCJA law without the temporary 

provisions extended. Thus, assuming policymakers would extend temporary provisions 

under both pre-TCJA law and the TCJA, Barro and Furman's estimates imply that the 

TCJA would raise 2027 GDP by 0. 7 percent ( 1.0-0.3 percent) relative to what it would 

have been without the TCJA. So, both in the context of the TCJA as written and under 

the assumption that temporary provisions are extended in a revenue-reducing manner, 

Barro and Furman estimate the effects on the size of the overall U.S. economy to be 

relatively small. 

C. Macroeconomic Feedback 

The increases in GDP are expected to offset, to some degree, the revenue losses of 

the TCJA, as estimated under conventional scoring, but do not come close to making 

the tax cuts self-financing (Table 1). For example, the CBO estimates the dynamic 

(or macroeconomic) effects reduce the primary 1 0-year deficit figure by 31 percent. 

The TPC and the Penn-Wharton Budget Model find offsets between 7 and 19 percent 

due to these macroeconomic feedback effects. The Tax Foundation is an outlier, projecting an offset of almost 70 percent ofthe revenue cost due to increased economic 

growth. 

V. DISTRIBUTIONAL EFFECTS 

A. Standard Distributional Effects without Financing 

The TPC estimates that the TCJA initially will cut taxes for most households, reducing 

household taxes, on average, by $1,610 in 2018- a 2.2 percent increase in after-tax 

income (Table 2). After-tax income is estimated to increase by a greater percentage for 

high-income households than for low-income households- 0.4 percent for households 

in the lowest quinti1e, compared with 2.9 percent for those in the top quinti1e, more 

than 4 percent for those in the 95th-99th percentile, and 3.4 percent for taxpayers in the 

BU00-A363290 with DISTILLER

Table2 

Distribution of Federal Tax Change by Expanded Cash Income Percentile, 20181 

Conference Agreement for H.R. 1, the TCJA 

Baseline: Current Law 

Summary Table 

Percent Share ofTotal Average 

Tax Units Change in Federal Federal 

Expanded Cash Number Percent of After-Tax Tax Tax 

Income Percentile'·' (Thousands) Total Income• Change Change($) 

Lowest quintile 48,780 27.7 0.4 1.0 -60 

Second quintile 38,760 22.0 1.2 5.2 -380 

Middle quintile 34,290 19.5 1.6 11.2 -930 

Fourth quintile 28,870 16.4 1.9 18.4 -1,810 

Top quintile 24,300 13.8 2.9 65.3 -7,640 

All 176,100 100 2.2 100 -1,610 

Addendum 

80-90 12,490 7.1 2.0 13.1 -2,970 

90-95 6,020 3.4 2.2 9.6 -4,550 

95-99 4,650 2.6 4.1 22.1 -13,480 

Top!% 1,140 0.7 3.4 20.5 -51,140 

Top OJ% 120 0.1 2.7 7.9 -193,380 

Notes: 5.2 millionAMT taxpayers are in the baseline; 02 million are under the TCJA. 

'Calendar year. Baseline is current law. Excludes effects of reduction in ACA Individual Shared Responsibility Payment to zero. 

http://www.taxpolicycenter.org/taxtopics/Baselioe-Definitions.cfin 

Average Federal Tax Rate' 

Change Under the 

(%Points) Proposal 

-0.4 3.7 

-1.1 7.6 

-1.4 12.4 

-1.6 15.8 

-2.2 23.3 

-1.8 18.1 

-1.6 18.5 

-1.8 20.2 

-3.1 22.2 

-2.3 30.3 

-1.8 31.6 

'Includes both filing and non-filing units but excludes those that are dependents of other tax units. Tax units with negative AG! are excluded from their respective income class 

are included in the totals. For a description of expanded cash income, see http://www.taxpolicycenter.org/TaxModel/income.cfm 

'The income percentile classes used in this table are based on the income distribution for the entire population and contain an equal number of people, not tax units. The break

as follows (in 2017 dollars): 20%, $25,000; 40%, $48,600; 60%, $86,100; 80%, $149,400; 90%, $216,800; 95%, $307,900; 99"/o, $732,800; and 99.9"/o, $3,439,900. 

'After-tax income is expanded cash income less individual income tax net of refimdable credits, corporate income tax, payroll taxes (Social Security and Medicare), estate tax, and excise ta

'Average federal tax (includes individual and corporate income tax, payroll taxes for Social Security and Medicare, the estate tax, and excise taxes) as a percentage of ave

expanded cash income. 

Source: Urban-Brookings TPC Microsimulation Model (version 0217-1 ). 
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top l percent. 10 Overall, the TPC estimates 80 percent of taxpayers will receive a tax 

cut averaging about $2,100 in 2018 due to the major provisions in the TCJA, while 

about 5 percent will face an average tax increase of around $2,800, and 15 percent will 

experience no significant tax change. 

The distributional effects in 2025 are similar to those in 2018. By 2027, however, 

the estimated distributional effects change substantially because of the expiration o1 

almost all the individual income tax and the estate tax provisions at the end of 2025. 

On average, taxes in 2027 are expected to be little changed for taxpayers in the bottom 

95 percent of the income distribution compared to pre-TCJA law (TPC Staff, 20 17). In 

2027, households in the top 5 percent of the income distribution are expected to receive 

virtually all of the net tax cuts, an average of$4,900 per household. 

B. Distributional Effects with Financing 

The standard distributional analyses shown above ignore the fact that tax cuts eventually have to be financed with higher taxes or lower spending. In this section, we 

explore the distributional effects ofthe TCJA using 2018 tax parameters and assume 

that one of three methods finances the tax cut: equal-dollar burden on each tax unit (per 

capita financing, or lump sum taxes), equal-share-of-income burden on each tax unit 

(proportional-to-income financing), and equal-share-of-pre-credit-income-tax liability 

burden on each tax unit (proportional-to-income-tax financing). The most regressive of 

the three options, per capita financing, is the method assumed in major macroeconomic 

analyses of the legislation (e.g., Barro and Furman, 20 18). Arguably, this approach is the 

one of the three that most closely resembles recent Administration and Congressional 

budget proposals to cut entitlement spending (Office ofManagement and Budget, 20 18; 

Stein, 2017; Werner, 2018). 

Table 3 shows that with per capita financing, the combined effect of financing and 

the major provisions of the tax overhaul would raise taxes or fees for 74 percent o1 

households (compared to less than 5 percent without financing), including for 100 

percent of households in the bottom quintile. Almost 80 percent of households in the 

middle quintile would face tax increases. 

If the TCJA were financed by proportional-to-income-tax increases or spending cuts, 

the combined effect of financing and the major provisions of the TCJA would raise 

taxes for 68 percent of households, including 91 percent of households in the bottom 

quintile and more than half of households in the middle quintile. 

10 Taxpayers in the 95th-99th percentiles would gain more as a share of their incomes than taxpayers in the top 

I percent because they benefit the most from the cutback in the individual alternative minimum tax, and 

because taxpayers in the top I percent are affected more by the restrictions on state and local tax deductions 

and the loss limitation provisions, which increase tax liability. The distributional effects of the individual 

income tax provisions in 2018 are similar to those of the TCJAas a whole. Tbe JCT (2018) estimates that 

the distribution of the pass-through provisions in the TCJA are even more regressive, with 44 percent of 

the benefit going to households earning more than $1,000,000 per year. Note that JCT estimates are not 

directly comparable to TPC estimates due to differing measures of income used to group taxpayers. 

BU00-A363290 with DISTILLER

Expanded Percent 

Cash Income with Tax 

Percentile" lncrease4 

Lowest quintile 1.2 

Second quintile 4.6 

Middle quintile 7.3 

Fourth quintile 7.3 

Topquintile 6.2 

All 4.8 

Table3 

TCJA with and without Financing 

Distribution of Federal Tax Change by Expanded Cash Income Percentile, 20181 

Baseline: Current Law 

Summary Table 

Without Equal Per Capita Proportional-to-Income Proportional-to-Income-Tax 

Financing Financing Financing Financing 

Percent with Percent Percent with Percent Percent with Percent Percent with Percen

Tax Increase Change in Percent Tax Increase Change in Percent Tax Increase Change in Percent Tax Increase Change 

>l%of After-Tax with Tax >!%of After-Tax with Tax >!%of After-Tax with Tax >I% of After-T

Income Income5 Increase4 Income Income5 Increase4 Income Income5 Increase4 Income Income

1.0 0.4 100.0 100.0 -11.1 90.8 79.7 -1.4 3.3 1.1 0.3 

2.7 1.2 98.3 95.2 -3.7 77.9 45.6 -0.8 7.8 3.8 0.7 

3.4 1.6 79.8 54.1 -1.2 56.3 28.8 -0.4 16.8 8.0 0.6 

3.3 1.9 38.1 15.6 0.2 50.3 21.8 -0.2 29.6 12.5 0.4 

2.3 2.9 17.7 5.8 2.3 45.2 22.2 0.6 45.4 23.0 -0.5 

2.4 2.2 74.2 63.1 0.0 68.1 44.6 0.0 17.0 7.9 0.0 

BU00-A363290 with DISTILLER

Table 3 (Continued) TCJA with and without Financing 

Distribution of Federal Tax Change by Expanded Cash Income Percentile, 20181 

Baseline: Current Law 

Summary Table 

Without Equal Per Capita Proportional-to-Income Proportional-to-Income-Tax 

Financing Financing Financing 

Percent with Percent Percent with Percent Percent with Percent Percent with Percen

Expanded Percent Tax Increase Change in Percent Tax Increase Change in Percent Tax Increase Change in Percent Tax Increase Change 

Cash Income with Tax >!%of After-Tax with Tax >l%of After-Tax with Tax >l%of After-Tax with Tax >!%of After-T

Percentile2.3 lncrease4 Income Income5 Increase4 Income Income5 lncrease4 Income Income5 lncrease4 Income Incom

Addendum 

80-90 7.6 2.9 2.0 23.1 8.2 0.9 50.2 24.3 -0.2 43.9 20.0 0.1 

90-95 5.5 1.4 2.2 16.7 3.9 1.5 54.1 26.5 0.0 55.0 27.5 -0.1 95-99 2.7 1.3 4.1 6.0 1.8 3.6 21.3 10.4 1.8 30.3 15.3 0.9 

Top!% 9.3 5.0 3.4 10.7 5.4 3.3 40.3 25.5 0.8 72.0 63.3 -2.6 

TopO.l% 16.2 9.7 2.7 16.8 9.9 2.7 46.7 34.7 0.1 81.2 73.1 -3.5 

Notes: 5.2 million AMT taxpayers in the baseline; 0.2 million in the proposal. Percent with changes refers to tax units. 

1 Calendar year. Excludes effects of reduction in ACA Individual Shared Responsibility Payment to zero. The Conference Agreement proposals' financing cost would be distrib

equally per tax unit http://wwwtaxpolicycenter.org/taxtopics/Baseline-Definitions.cfm 

2 Includes both filing and non-filing units but excludes those that are dependents of other tax units. Tax units with negative AGI are excluded from their respective income class 

are included in the totals. For a description of expanded cash income, see http://www.taxpolicycenter.org!faxModellincome.cfrn 

3 The income percentile classes used in this table are based on the income distribution for the entire population and contain an equal number of people, not tax units. 

breaks are as follows (in 2017 dollars): 20%, $25,000; 40%, $48,600; 60%, $86,100; 80%, $149,400; 90%, $216,800; 95%, $307,900; 99%, $732,800; and 99.9%, $3,439,

4 Includes tax units with a change in federal tax burden of $10 or more in absolute value. Due to data limitations, excludes repeal of exclusion for employer-provided qu

fied moving expense reimbursements, repeal of deduction for moving expenses (other Armed Forces members), retirement plan and casualty loss relief for disaster ar

repeal of deduction for alimony payments and corresponding inclusion in income, simplified accounting for small business, modification treatment of S corporation 

versions into C corporations; limitation and repeal of deduction by employers of expenses for certain fringe benefits, modification of limitation on excessive emplo

remuneration, tax gain on the sale of partnership interest on look-thru basis, craft beverage tax reform, and individual income tax portion of certain business provisi

'After-tax income is expanded cash income less individual income tax net of refundable credits, corporate income tax, payroll taxes, estate tax, and excise taxes. Source: Ur

Brookings TPC Microsimulation Model (version 0217 • 1 ). 
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If the TCJA were financed by tax increases that were proportional to income tax 

liability, the results would be much more progressive because this approach builds on 

the highly progressive individual income tax. The combined effect of proportional-toincome-tax financing and the TCJA would raise taxes for 17 percent of households, 

with larger increases, on average, for higher-income households. Only 3 percent 

of households in the bottom quintile would face a tax increase under this financing mechanism compared to 72 percent of those in the top I percent of the income 

distribution. 

C. Distribution with Financing and Growth 

Incorporating optimistic estimates for faster economic growth does not change the 

distributional results very much. To illustrate this, in Table 3, we examine the share of 

households whose net tax burden in 20 I8 after the tax cuts and financing would increase 

by more than I percent of pre-TCJA baseline after-tax income. This approximates the 

share of tax units whose after-tax income would drop even after accounting for an 

economy that was I percent larger due to the TCJA. 11 Under equal per capita financing, 

63 percent of households would experience a net tax increase greater than 1 percent of 

pre-TCJA baseline after-tax income, including every household in the bottom quintile 

and 54 percent of households in the middle quintile. Under proportional-to-income 

financing, 45 percent of households would experience a net tax increase greater than I 

percent of pre-TCJA baseline after-tax income, including 80 percent of households in 

the bottom quintile and 29 percent of households in the middle quintile. 

Under proportional-to-income-tax financing, only 8 percent of households would 

experience a net tax increase greater than 1 percent of pre-TCJA baseline after-tax income 

and these tax increases would be heavily concentrated among high-income households. 

D. Horizontal Equity 

Traditional tax policy principles call for the tax system to promote horizontal equity 

or to provide roughly similar tax treatment for taxpayers in similar circumstances. 

This is often interpreted as taxpayers with equal income facing equal tax liabilities. 

The TCJA largely dispenses with this notion by introducing new distinctions for various types of income-producing activities. 12 For example, income for a wage earner is 

taxed differently than income for an owner of a pass-through business. Additionally, 

different types of pass-through businesses are taxed differently (e.g., accountants and 

lawyers are more limited in their deduction for pass-through income than architects and 

engineers). In all these ways, the TCJA makes distinctions that undermine the policy 

11 This growth assumption is generous since several studies estimate the growth effect to be less than I 

percent of GDP (Table I). Moreover, as discussed above, the resulting increase in national income would 

be smaller than the increase in GDP. 12 Toder (20 18). 
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principle of horizontal equity (though there may be efficiency or other reasons for these 

distinctions ). 13 

VI. COMPLEXITY AND COMPLIANCE 

The TCJA will simplifY taxes in three main areas. First, the TPC (20 18) estimates that 

the number of people who itemize will fall by more than hal fin 2018, from 26.4 percent 

under prior law to about 11 percent under the TCJA. This will reduce recordkeeping 

for millions of households. Second, the TPC estimates that the number of taxpayers 

subject to the individual AMT (a particularly complex provision) will fall from 5.2 million in 2018 to about 200,000 because of the increase in the AMT exemption amount, 

the income threshold at which the exemption starts phasing out, and the elimination or 

curtailment of the two main provisions that caused most taxpayers to be on the AMT: 

the state and local tax deduction and personal exemptions (TPC, 2018). Third, the 

expansion of expensing for equipment purchases will simplifY recordkeeping for many 

individuals who report business income on their tax returns and for many businesses 

filing corporate and partnership tax returns. Simplified accounting methods for smaller 

businesses (such as increased use of cash accounting) will also reduce compliance costs. 

Despite those gains, it seems likely that the TCJA will end up making taxes more 

complicated on net for many taxpayers. The main sources of additional complexity are 

(1) the new distinctions that the TCJA creates between tax rates on wage and salary 

earnings and pass-through business income of individual taxpayers, (2) the distinctions 

between profits of C corporations and pass-through businesses, and (3) the new international taxation provisions (Avi-Yonah eta!., 2017; Looney, 2017a; Toder, 2018). In 

addition, the hasty manner in which the bill was enacted left many ambiguous provisions 

and a substantial number of glitches in the law. Some of these issues may be addressed 

in subsequent interpretive guidance, but that is a slow process. Finally, almost all the 

individual income tax provisions and some of the corporate income tax provisions are 

scheduled to expire during the next decade. These factors will create complexity and 

uncertainty, as taxpayers aim to plan around the ambiguities in the law and assess the 

likelihood that provisions will be extended beyond their scheduled expiration dates. This 

added complexity will provide opportunities for aggressive taxpayers to be non-compliant 

and will make it more difficult for taxpayers trying to be compliant to navigate the rules. 

VII. SECTORAL EFFECTS 

A. States and Infrastructure Spending 

The TCJA contains provisions that affect state governments and may make it 

more difficult to sustain political support for current or increased levels of state 

13 Supplementing these qualitative observations with quantitative estimates of the magnitudes would be a 

valuable area for future work. 
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spending (Feldstein and Metcalf, 1987). The limit on the itemized deduction for 

state and local taxes by itself is quite progressive: 96 percent of the higher federal income taxes are expected to be paid by taxpayers in the top 20 percent of the 

income distribution and 57 percent by taxpayers in the top I percent (Burman and 

Sammartino, 2018). However, to the extent it reduces political support for state and 

local spending (by increasing the after-tax cost for some taxpayers), the cap on the 

deduction could prove to be less progressive, as the majority of such spending goes 

to items such as education, health, and income support that mainly help low- and 

moderate-income households (Leachman and Lav, 20 17). The limit on deducting state 

and local taxes may also reduce public support for more progressive state income 

taxes. 14 

The tax overhaul will also increase the cost to states of issuing tax -exempt municipal 

bonds because the reduction in corporate and individual tax rates under the TCJA will 

increase the interest rates borrowers require on municipal bonds to keep their returns 

competitive with similar risk taxable bonds (Bergstresser, 20 17). This will increase the 

cost to states of debt-financing infrastructure at the same time that political support for 

taxes that fund infrastructure may be weakened. 

B. Healthcare 

While not the main focus of the TCJA, the tax overhaul is expected to have some 

predictable and largely negative effects on health insurance coverage. One part of the 

TCJA undercuts the "individual mandate" in the ACA by eliminating the penalty on 

individuals for not having adequate health insurance. The CBO estimates that this change 

will reduce the number of people with health insurance by about 8-9 million by 2027 

since it directly reduces the number of people who choose to purchase insurance and 

raises premiums for individual insurance coverage. 15 

The TCJA's cuts to alcohol excise taxes, if passed through to consumers via lower 

prices, will raise alcohol consumption and could thereby raise alcohol-related deaths, 

crime, domestic violence, alcohol-related injuries, as well as costs to law enforcement 

officials and health providers. 16 

14 Some high-tax states are considering ways to permit their residents to circumvent the $10,000 annual 

limit on the itemized deduction for state and local taxes. Two possible approaches are (I) allowing certain 

charitable contributions to be credited against income taxes and (2) converting income taxes to employerpaid payroll taxes. It is not clear if these or other approaches are practical to implement or if they would 

stand up to legal challenge. 15 In 2017, the CBOestimated that the elimination of the mandate would reduce the number of insured individuals by 13 million by 2027 (CBO, 2017). Using an updated model, the CBO (2018b, p. 20) reports that 

"the projections explained in this report incorporate revised methods for estimating the effects of eliminating the penalty. Using those updated methods, CBO and JCT estimate the reduction in health insurance 

coverage is about one-third smaller than the agencies previously estimated [i.e., one-third smaller than 13 

million]." 16 One estimate suggests that the legislation could cause around 1,550 alcohol-related deaths per year, including between 280 and 660 additional motor vehicle deaths (Looney, 20 17b ). 
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C. Charitable Sector 

The increase in the standard deduction and limits on itemized deductions will significantly decrease the number of taxpayers who itemize and thus reduce the number of 

taxpayers who deduct amounts given to charity. The number of households who claim 

a deduction for charitable contributions is projected to fall from 37 million to 16 million in 2018, or from 21 percent of tax units to 9 percent (TPC, 20 18). The reduction in 

individual marginal income tax rates and the increase in the estate tax exemption also 

diminish incentives for charitable giving. Those who continue to itemize are likely to 

be those with the highest incomes, who are also likely to be larger donors to charities. 

Thus, charities may lose many meaningful donations from millions of moderate-income 

households but experience a less substantial change in aggregate donations. The TPC 

estimates that the TCJA will reduce charitable giving by about 5 percent. 17 Additionally, since the estate tax directly reduces the price of charitable bequests compared to 

transfers to heirs, the temporary increase in the estate tax exemption in the TCJA may 

also reduce charitable giving by upper-income households (Bakija and Gale, 2003). 

D. Housing 

As noted above, the increase in the standard deduction will reduce the number of 

people who could benefit from itemized deductions related to homeownership. For 

some homeowners who previously itemized deductions, the scaled-back deductions for 

interest on new mortgages and on property taxes will make housing expenses costlier. 

The number of people who claim the mortgage interest deduction is expected to fall 

from 36.9 million (21 percent of households) to 16 million (9 percent) under the TCJA 

(TPC, 20 18). 18 The changes may slow the growth in home prices, with the biggest effects 

for higher-priced homes and higher-income areas, but they are unlikely to significantly 

affect homeownership rates (Bartlett, 20 13; Zandi, 20 17; Gale, Gruber, and StephensDavidowitz, 2007; Gruber, Jensen, and Kleven, 2017; Kolomatsky, 2017). 

E. Trade Deficits 

In a standard macroeconomic analysis, the TCJA will increase the U.S. trade deficit. 

By increasing the federal budget deficit and encouraging U.S.- and foreign-owned 

business to invest more in the United States, the act will cause an inflow of funds 

to the United States. This, in tum, will cause the current account deficit to rise. As a 

17 Gleckman (20 18). See also Indiana University Lilly Family School of Philanthropy (20 17). which predicts 

a 4.5 percent decline, and Brill and Choe (2018), who predict a decline of 4.0 percent. The tax overhaul 

may also change the composition of donations since wealthier individuals tend to give to organizations 

such as museums and universities, while smaller donations by middle-income individuals tend to go more 

to social service and religious organizations (Frankel, 20 17). 

" The estimates are coincidentally similar for the mortgage interest and the charitable contribution deductions. 
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mathematical identity, if more money flows into U.S. capital markets from overseas, it 

has to be balanced by increased U.S. net purchases (imports minus exports) of current 

goods and services from overseas. Thus, the trade deficit is expected to increase in the 

wake of the TCJA. However, the TCJA may reduce one component of the measured 

trade deficit that makes the current trade deficit look larger than it really is. When 

U.S. firms hold intangible assets (patents, trademarks, etc.) in affiliates in low-tax 

foreign countries and pay royalties for use in production, the royalty payments to the 

foreign affiliate are treated in the national accounts as imports- as if the U.S. parent 

is purchasing services from the foreign affiliate. Thus, the mispricing of assets shifted 

between components of a U.S. multinational firm (incorrect "transfer prices") distorts 

the measurement of the trade deficit in government statistics. To the extent that they 

reduce incentives for U.S. multinationals to shift income earned by intangible assets 

to low-tax countries, the TCJA's international provisions, such as GILT! and FDII, 

will reduce the measured trade deficit, even if there is no change in where products are 

developed, produced, or consumed. 

VIII. UNCERTAINTY 

The future is always uncertain, but it seems particularly so with respect to many 

aspects of the TCJA. One set of issues concerns the effects of actual provisions of the 

new law: the impact of the new low corporate income tax rate on capital flows and 

investment, the extent to which corporate tax cuts lead to higher wages, whether the 

pass-through rules will prove administrable, and how multinational firms will respond 

to provisions such as BEAT and GILTI. 

Another set of uncertainties is how other policymakers will respond: Will the Federal 

Reserve Board raise short-term interest rates in response to a tax cut that took effect at 

a time of full employment? How will states respond to the new limits on deductions for 

state and local taxes? Will other nations cut corporate taxes or adopt other tax incentives 

in response to the TCJA? Will U.S. trading partners challenge some new provisions 

as inappropriate trade subsidies or barriers via the World Trade Organization (WTO)? 

BEAT, for example, might be perceived as a selective import tariff and FDII as a selective export subsidy, in violation ofWTO rules. 

Other uncertainties center on the future of the legislation itself. Will Congress enact 

a technical corrections bill or a corrective reform package? The implementation ofthe 

TCJAmay reveal administrative and enforcement flaws -such as in the pass-through 

rules or international provisions - that require structural reform. A similar episode 

occurred after the 1981 tax cut created enormous tax shelters and led to tax law changes 

in both 1982 and 1984, and, ultimately, the Tax Reform Act of 1986. 

Will Congress extend the temporary provisions in the TCJA? As with the Bush tax 

cuts in 2001 and 2003, the plethora of temporary provisions in the TCJA virtually 

guarantees that lawmakers will have to revisit tax policy in the near future. 

Will the TCJA change the politics of tax reform and the support for many long-standing 

provisions? The sharp decline in the number of filers who itemize their deductions could 
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reduce political support for itemized deductions and lead to further restrictions on such 

items (Graetz, 2011; Taylor, 2018). 

IX. CONCLUSION 

The TCJA's most fundamental and novel changes relate to domestic and international corporate tax rules and the tax treatment of pass-through business income. By 

reducing revenues and introducing structural changes, the TCJA seems more like the 

Economic Recovery and Tax Act of 1981 than the Tax Reform Act of 1986. The new 

law contains many ambiguities, phases out many provisions overtime, and leaves U.S. 

revenues significantly below what is needed to address long-term fiscal shortfalls. All 

these aspects invite reconsideration over the next several years of the tax policy choices 

made in the TCJA. 

ACKNOWLEDGMENTS AND DISCLAIMERS 

This work was supported by the Laura and John Arnold Foundation. The authors 

thank Alan Auerbach, Len Burman, Stacy Dickert-Conlin, Michelle Hanlon, Ben Page, 

and Robert Strauss for helpful comments. All opinions are our own and do not reflect 

the views of the Tax Policy Center, the Brookings Institution, the Urban Institute, or 

their funders. 

DISCLOSURES 

The authors have no financial arrangements that might give rise to conflicts of interest 

with respect to the research reported in this paper. 

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of the Tax Cuts and Jobs Act: A Preliminary Analysis." Tax Policy Center, Washington, DC. 

Gale, William G., Jonathan Gruber, and Seth Stephens-Davidowitz, 2007. "Encouraging Homeownership through the Tax Code." Tax Notes (June 18). 
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610 National Tax Journal 

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New York, NY. 

BU00-A363290 with DISTILLER

2017 Tax Law-Impact on the Budget and American Families 

Hearing of the United States House of Representatives Committee on the Bud

Wednesday, Feb. 27, 2019 

Exhibit A to Written Testimony of Professor Caroline Bruckner; 

Executive-in-Residence, Accounting and Taxation 

Managing Director, Kogod Tax Policy Center 

Kogod School of Business, American University 

Feb. 27, 2019 

BU00-A363290 with DISTILLER

Background on Women Business Owners (WBOs

• WBOs account for 40% of all U.S. firms and the total 

number of women-owned firms has increased over 

the last ten years by 58% 

• WBOs are small businesses (99%) primarily 

operating as service firms (more than 60%) and 

continue to have challenges growing receipts and 

accessing capital. 

• Women of color are the "driving force behind the 

growth of women-owned firms." Firms owned by 

women of color grew at a rate of 163% during the 

last 10 years and today, women of color own 64% of 

the new women-owned businesses launched each 

day. 

The 2018 State of Women-Owned Businesses Report, Ventureer 

(2018), available at 

Industry Representation 

• Half of women-owned businesses are conce

three industries: other services, health care 

assistance, and professional/scientific/techn

services. 

• Women are significantly more likely to launc

businesses within the healthcare (10%) or e

sectors (9%) than men (5% in both cases). In 

men are significantly more likely to start bus

the construction and manufacturing industri

than women (4%). 

• Women-owned businesses employ the mos

healthcare and social assistance (20%), 

accommodations and food services (16%) a

administrative, support and waste managem

services (13%). 

• Women-owned businesses have the highest 

revenue in wholesale trade (17%), retail trad

and professional, scientific and technical ser
124 


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JCT Distribution of 199A 

I able 3. -Dislribulion GfT ax Benefit for Pass-Through Deduction 

r nder Section 199 A 

2018 2024 

i1ccme Category [1] 

Returns $ Bilions Returns !Mlfionsl IMiionsl 

Less 1han $1 0,000 ............................ [2] [3] [2] 

$10,000 to $20,000 ........................... 0.5 ·$0.1 0.6 $20,000 to $30,000 ........................... 1 0.7 ·$0 . ..: 0.7 $30,000 to $40,000 ........................... i 0.8 ·$0.2 0.8 $40,000 to $50,000 ........................... i 0.9 ·$0. 1.0 

$50,000 to $75,000 ........................... j 2.5 ·$1.C 2.6 $75,000to$100,000 ......................... 1 2.5 -$1. 2.6 $100,000 to $200,000 ....................... 6.2 6.5 $200.000 to $500,000 ....................... 1 3.0 -$9.4 3.2 $500,000 to $1,000,000 ................. ...! 0.2 ·$3.€ 0.3 $1,000,000 and over ......................... I 0.2 ·$1H 0.2 

Total, M Taxp&'}lers ....................... 17.4 18.4 

$ 

131 

·$0.1 

·$0.2 ·$0.4 

·$1.3 

-$1.5 

·$8.0 

·$11.6 

·$5.3 

·$31.6 

-$60.3 

Table 3 of JCT's distributional analysis of 1

than 90% of the revenue loss generated fr

new pass through deduction under IRC §1

flow to firms with income of more than $1

2018 and 2024. 

• JCT found in 2018, 44% of the IRC §199A 

loss will flow to pass-through businesse

$1,000,000 of income. Moreover, JCT p

that the 44% revenue loss distribution w

increase to 52% by 2024. 

• 88% (or 10,775,600) of women business 

generate revenues less than $100,000. 

of women-business owners have receip

$1,000,000 or more 

Joint Committee on Taxation, TABLES RELATED TO 

SYSTEM AS IN EFFECT 2017 THROUGH 2026 (JCX-32R

24,2018. 
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Center on 

Budget 

and Policv 

Prioritie·s 

December l9,2!llli 

820 First Strcl:t :'\iE, Suite 310 

Washington, DC 20002 

Tel: 202-408-lORO 

Fax: 202--W8-Hl56 

ccntcr'tr cbpp.org 

W\\ "' .cbpp.org 

Pass-Through Deduction in 2017 Tax Law Could Weaken 

Wages and Workplace Standards 

Bv Brendan Duke 

A key provision of last year's tax law- a law that supporters claim \v:ill boost \vages and create 

good jobs~ may contribute to ''workplace fissuring," \vhich occurs when firms 1 acquire workers' 

services without employing them directly.2 Examples include hiring truck drivers as independent 

contractors instead of as employees or hiring a janitorial services firm instead of hiring janitors 

directly. \Xlorkcrs employed in some of these arrangements tend to be paid less than workers that 

firms employ directly, extensive evidence shows. In fact, increasing evidence suggests that some 

types of \Vorkplace fissuring may contribute to growing compensation inequality. 

The provision in question is the new 20 percent deduction for certain ~'pass-through" incomeincome that owners of businesses such as partnerships, S corporations, and sole proprietorships 

report on their indiv1dual tax returns, which previously was taxed at the same individual tax rates as 

their wage and salary income. The deduction reflects the tax law's three fundamental flaws: it is 

heavily tilted toward the wealthy, loses significant revenue at a time when the federal government 

needs additional revenue, and makes it easier for wealthy individuals to game the tax system.3 

Policymakers should be working to alleviate workplace fissuring and compensation inequality, but 

the pass-through deduction may encourage more of hoth in two basic ways: 

• Because it provides a tax break for independent contractors but not employees, 

employers can use it to entice new hires to accept independent contractor positions, 

even though the drawbacks for those workers could outweigh their tax gains. The 

deduction results in a lower tax rate for business owners (including independent contractors) 

than for traditional employees. \Xl orkers may be more inclined to accept independent 

1 "Firm" here refers to both C-corporations and pass-throughs. 

2 This term comes from fom1er li.S. Department of Labor official and Brandeis University Dean David \Xreil. :\lfuch of 

this paper draws on his book T!JP r'iuun'd tf"orkplacf (Harvard University Press, 2014). 

1 Chuck Marr, Brendan Duke, and Chye~Ching Huang, ":\lew Tax Law ls l-'undamentally Flawed and \\iill Require Basic 

Re;"m<ctucino.' Center on Budget and Policy Priorities, updated 14, 
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contractor positions because of the deduction and employers may try to use it as a way to shift 

toward hiring independent contractors instead of traditional employees. 

Importantly, many of the disadvantages of independent contractor status for workers are 

advantages for employers. Unlike employees, independent contractors don't enjoy legal 

protections regarding the minimum wage, overtime, sexual harassment, and workplace safety. 

Employers that provide benefits to employees such as health insurance typically don't provide 

them to independent contractors. And independent contractors must pay the employer's share 

of payroll taxes. Employers have an incentive to not disclose these drawbacks for employees 

or understate them relative to the deduction so that contractors won't try to negotiate higher 

pay to make up for them. 

• It could further encourage firms to adopt arrangements that push workers outside of 

direct employment, such as contracting out and franchising, which typically lead to 

lower wages and lower benefits for affected workers. The profits of a contractor firm 

organized as a pass-through are eligible for the deduction, while a manager's salary is not. So, 

with the deduction, the owner-manager of a contractor firm can do the same work as an inhouse manager and have the same rake-horne pay, even though the lead firm pays them less. 

In this way, the lead firm can capture a portion of the deduction's tax savings. 

Similarly, a firm may choose not to open a "branch" (where it employs a manager and 

workers) and instead expand with a "franchise" (where the manager owns the establishment 

and pays royalties to the original firm, and the remaining profits are eligible for the deduction). 

That way, the firm can effectively pay the franchise owner less than a manager without 

reducing the owner's after-tax income. 

Rank-and-flle workers would remain traditional employees, but would work for the contractor 

firm or franchise instead of the lead firm. Considerable evidence suggests that contracting out 

and franchising lead to lower wages and benefits for workers. 

Many tax experts across the political spectrum have already criticized the pass-through deduction 

because it taxes similar types of income at different rates based on arbitrary distinctions, many based 

on political influence rather than the economy's needs. An uneven playing field can create numerous 

distortions in individuals' and businesses' decisions, including those about how to classify and 

organize work. American Enterprise Institute economist Stan Veuger, for example, called the passthrough deduction "a particularly egregious form of industrial policy: not only does it select winning 

and losing industries, it also selects winning and losing organizational structures."4 David Kamin, a 

tax and budget official in President Obarna's White House and now a New York University Law 

2 
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School professor, termed it "one of the worst provisions that's been added into the tax code in the 

last several decades." 5 

The law's supporters may say the pass-through deduction's incentives for workplace fissnting 

encourage entrepreneurship. And, on paper, the deduction could create a large number of new 

businesses. But this is not the type of entrepreneurship that spurs innovation and job creationinstead, it would merely reflect firms breaking themselves into pieces to capture tax savings. 6 At the 

same time, federal tax policy is creating incentives that could push workers into employment 

arrangements that could further depress wages and weaken workplace standards, while creating 

significant costs and inefficiencies. Policymakers who want to increase entrepreneurship should 

instead focus on real barriers to it- as the Affordable Care Act (ACA) did by making affordable, 

quality health coverage more available in the marketplace, thus making it less risky for individuals to 

start their own businesses.7 

There are no estimates to date of how much the 2017 tax law will drive fissuriog or the exact 

forms it may take, especially as the IRS has only begun to issue guidance on what's eligible for tbe 

pass-through deduction. But the law's incentives for a shift toward independent contractors, 

contractor firms, and franchises appear straightforward, and the evidence showing that workers in 

some of these arrangements are paid less is significant. Rushing to enact the law, lawmakers did not 

even acknowledge this risk to workers. 

The pass-through deduction has drawn criticism for its regressivity, cost, and potential for gaming 

the tax system. The fact that it also could also promote outsourcing, wage stagnation, and 

compensation inequality is another strong argument for its repeal. 

Deduction Could Encourage Employees to Become Independent Contractors 

The 2017 tax law lets business owners deduct 20 percent of certain pass-through income, 

effectively reducing the marginal individual tax rate on that income by one-fifth. Before the Jaw, this 

income was taxed at the same individual tax rates as ordinary income, such as wages and salaries. 

s Chye-Ching Huang, "Senate Hearing Testimony Highlights 2017 Ta.x Law's Fundamental Flaws," Center on Budget 

and Policy Priorities, April25,2018, ~\\\\\\.cbpp.<~w hloo '-cn,uv hc,lrvw tc.-tm1•Jtn hwhl~<dl1, 2ul- u" Lt\\S· 

funllill.ll£!lUlLt1il~\~; Marr, Duke, and Huang. 

6 Shu Yi~Oei and Diane Ring of Boston College Law School examined the legal and other issues that could determine 

how much employment shifts toward independent contracting (but not contractor firms or franchises) as a result of the 

deduction. They concluded that much v.-ill depend on how the IRS and courts interpret the 2017 tax Jaw and other 

statues as well as businesses' assessments of the risks, their industry's structures, and their willingness to change their 

rdationship with workers. See Shu-Yi Oei and Diane M. Ring, "Is New Code Section 199A Really Going to Tum Us All 

into Independent Contractors?," Boston College Law School Legal Studies research paper, January 12,2018, 

lmp~:, p,lpcrs."'<>m.comis(!!Jip,tpers.cfm~allstract td--_1jlll iKll. 

3 
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Proponents claimed the deduction would create jobs by reducing tax rates on business owners,8 but 

many self-employed independent contractors such as freelance web designers or plumbers- are 

also eligible for it.9 As a result, independent contractors are now taxed at a lower rate than 

employees who do the same work. 10 That creates a tax incentive for employees to become 

independent contractors. 

For instance, by switching from employee to independent contractor status, a single earner 

making: 11 

• $50,000 would get a tax cut of $900. $50,000 is around the median annual salary of electricians 

($54,100), plumbers ($52,600), and graphic designers ($48,700).12 

• $75,000 would get a tax cut of $2,800. $75,000 is around the median annual salary of accountants 

($69,400), architects ($78,500), and chemists ($74,700). 

• $120,000 would get a tax cut of$5,200. $120,000 is around the median annual salary oflawyers 

($119,300), pharmacists ($124,200), and computer hardware engineers ($115, 1 00). 13 

Independent Contracting Has Significant Drawbacks for Workers 

Recent IRS guidance on the pass-through deduction could make it hard for employees to switch 

to an independent contracting position with their current employers and receive the deduction. Yet, 

how the IRS enforces that restriction remains to be seen. As former Treasury Department official 

Adam Looney points out, "If you're an employee one year, and then a contractor the next year, will 

they [the IRS] actually know that?"" 

9 Recent U.S. Bureau of Labor Statistics (BLS) data indicate that 6.9 percent of workers were independent contractors in 

2017. That's a slight decline from the 7.4 percent figure for 2005, despite the recent attention to "gig economy" jobs 

(such as Uber drivers) in which workers are classified as independent contractors. The BLS data, however, measure what 

workers do for their main jobs; much of this work is likely done as a side job and so is not captured by the survey. See 

Annette Bernhardt, «Making Sense of the New Government Data on Contingent Work," Medium, June 10,2018, 

~ ·, hlon.u<..qournal.com 'nukm<· "<.."\1'-C of the nc\\ cro\Tnlllll'nt cLna on C\>!lUJ..I.1,:Q.l.L...\l.!.l[L~J-2tl'Jhhik()[.". 

10 To be sure, as discussed below, independent contractors have to pay both the employer and employee portions of 

payroll taxes while employees only have to pay the employee portion. The payroll tax rate for employees and 

independent contractors is the same, however, if one considers the employer's portion of the tax a coming out of an 

employee's pre-tax compensation, as the employee typically "pays" the tax in the form of lower wages. See Jonathan 

Gruber, «The Incidence of Payroll Taxation: Evidence from Chile," Journal ciflAbor Economics, Vol., 15, No.3, 1997, pp. 

72-101. 

11 Calculations asstune that these workers take the standard deduction. 

12 U.S. Bureau of Labor Statistics, Occupational Employment Statistics, May 2018, hup-;: \\\\ \\·.hb.j'<!\ / ( )c;; /. 

13 The potential tax savings are small for workers with low incomes since the pass-through deduction is limited to 20 

percent of taxable income. A single earner making $16,000 in pass-through income (and no other income) who takes the 

$12,000 standard deduction only gets $80 of tax savings from the pass-through deduction. 

14 Brian Faler, "Pass-through regulations take aim at contracting gamesmanship," Politico, August 9, 2018, 

http< / :;uhscnbcr.po!iticoprn.cnm · t:~:-../"\'Lhttt.h\)ard, .:!tl 1 S '(IS 'p.tss throw.:h rc~>u!auon~ t,l.kc .um at contractlt1f 

<~'.tmc~m,u1<>h1p l-1512. Moreover, Congress has not increased the IRS's enforcement budget to deal with this and 

other enforcement challenges presented by the 2017 tax law: in 2018, it left enforcement at roughly the same level as in 

4 
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Perhaps more importantly, the IRS guidance to date does nothing to limit the deduction for 

individuals who become independent contractors with nm' employers, 15 and workers on the job 

market may be more inclined to accept independent contractor status because of it. In response, 

employers could post new positions as independent contractor, instead of employee, positions. 

These new "independent contractor" positions may not actually meet the legal requirements for 

independent contractor status - which involves such issues as how much autonomy the worker has 

but this type of misclassificarion is already pervasive, as discussed below. 

There are many drawbacks for workers '\vho become independent contractors, and these workers 

may underestimate them relative to the value of the pass~ through deduction. For example, a wide 

array of labor protections does not apply to independent contractors, such as minimum wage and 

overtime la\vs, sexual harassment protections, and Occupational Safety and Health Administration 

(OSHA) regulations.'" Nor do independent conrractors qualify for ptof,'Tams such as workers' 

compensation and unemployment insurance. 17 

In theory, a worker considering an independent contractor position could negotiate higher 

compensation to offset the Joss of these protections. But evidence suggests that a significant portion 

of cumnt self-reported self-employed workers don't know that they don't have these protections: a 

study for the U.S. Labor Department found that over a third of workers who reported that they're 

self-employed thought they were eligible for the minimum wage, OSHA regulations, or Family and 

Medical Leave Act (FMLA) protections, even though self-employed workers are not eligible for any 

ofthem. 18 

Independent contractors also don't receive employer-provided benefits- c. g., health insurance, 

paid family and medical leave, vacation, retirement benefits, disability insurance, and long-term care 

insurance. Independent contractors must also pay the employer's half of payroll taxes. These are 

2017 and $1.5 billion (23 percent) below its 2010 level in inflation~adjusted terms. Emily 

blls Short for the IR.\" CBPP, March 23, 

17 \Xreil, p. 21. 

I-Technical Report," Abt Associates, 

"Understanding of 
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considerable sums: for each dollar that employers spend on wages~ they spend (on average) another 

36 cents on benefits and 11 cents on taxes and contributions to unemployment insurance and 

worker compensation programs. 19 Thus, an employee with a $50,000 salary could easily have a total 

compensation package of more than $73,000, when the cost of benefits and taxes are taken into 

account. Independent contractors could negotiate additional compensation to cover the cost of 

these items, but they may not know what they're worth- particularly benefits that typically cost 

more when purchased independently, like health insurance.20 

Independent contractors have other burdens as well. They must calculate their taxes themselves 

and make quarterly payments to the IRS. (For most employees, their employers calculate their taxes 

and withhold them from their paychecks.) A recent examination of Uber drlvers' online comments, 

ho\vever, found that many didn't understand that they must pay taxes on their payments from 

Uber.21 Further, calculating these taxes can be complicated, especially since independent contractors 

have to track expenses and figure out which ones they can deduct.22 Those who don't understand 

these rules or don't budget accordingly may face large tax bills when they file their tax returns, and 

they may have to pay penalties for not complying with the rules. 

Independent Contracting Has Significant Advantages for Employers 

j\fany of the disrtdrantages for independent contractors (as discussed above) are advantap,es for 

employers. Employers are unlikely to fully disclose these disadvantages to \Vorkers weighing an 

independent contractor job or may say that the pass-through deduction will offset them, whether 

true or otherv.rise. Since many current self-employed workers don't understand these issues- and 

many people don't understand which financial decisions, on these and other complex matters, best 

serve their interests24 - employers have the upper hand to use the pass-through deduction to rely 

more on independent contractors and cut their labor costs. 

The employer benefits of relying on independent contractors are so substantial that many 

employers apparcncly already violate tax and labor laws by labeling workers who meet the legal 

10 t .S. Bureau of Labor Statistics, ''Table 1. Employer costs per hour worked 

compensation: civilian workers, by major occupational and industry group," 

21 Shu-Yi Oei and Diane :\L Ring, "The Tax Lives of L'bcr DriYers: Evidence from Internet Discussion Porums," 

Colnmbia Journal qfTax lAw, VoL 8, 2017. 

22 The 2017 tax law also eliminates the ability to deduct tax preparation fees, making them more expensive for some 

filers. 

24 For an exploration of some of the literature on the difficulty most people have making rational financial decisions, see 

'The Committee for the Pri;;:e in Economic Sciences in ;\lemory of Alfred Nobel, "Scientific Background on the Sveriges 

Riksbank Prize in Economic Sciences in ~obd 2017 Richard I I. TI1aler: Economics with 

6 
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definicion of employees as independent contractors. \~'hile "the national extent of employee 

misclassification is unknown;" a 2009 study by the GoYernment Accountability Office (GAO) 

found," ... earlier and more recent, though not as comprehensive, studies suggest that it could be a 

significant problem with adverse consequences."25 State government audits find that between 10 and 

30 percent of audited employers misclassify employees as independent contractors.26 Such 

misclassification potentially deprives millions of employees of the protections, benefits, and 

employer-paid taxes to which they're entitled. 

Deduction Could Encourage Outsourcing to Contractor Firms and Franchises 

The 20 percent deduction also creates incentives for companies to rely more on contractors and 

franchises. The profits of a contractor tirm or franchise that's organized as a pass-through are 

eligible for the deduction, while the salary of the in-house manager of a company division or branch 

is not. That means, for example, that a manager who makes $150,000 a year can receive a $6,600 tax 

cut from becoming an owner-manager. Higher-salaried managers can receive even larger tax cuts: 

$20,200 for a manager making $300,000 and $34,200 for a manager making $500,000. To the extent 

that o\vner-managers of contractor firms and franchises effectively share the tax savings with the 

lead firm, as explained below, these forms of workplace fissuring will become more attractive to lead 

firms. 

Contractor Firms 

Outsourcing to contractor firms occurs when a company contracts to obtain the services of 

workers from another firm. No one knows definitively how widespread this phenomenon is~ but 

research indicates that it's prevalent and growing. I'~ One study estimates that the share of all workers 

employed in "business service firms" - firms that provide services to other finns- grew from 

under 2 percent in 1950 to over 8 percent in 2015.28 Even more striking, it found that, over the same 

period, the share of cleaning and janitorial service workers employed by such firms t,rrcw from 2 

percent to over 25 percent and the share of security workers rose from 3 percent to 35 percent. 

FS. Gm:-ernment Accountability Office, 2009. 

2- The Bureau of Labor Statistics Survey on Contingent \X..'orkcrs and Alternative Employment Arrangements found a 

very small share of workers employed by contractor firms, but experts on the topic do not believe that the BLS estimate 

captures the full scope of such arrangements since the survey asks about work for onJy one type of contractor tlrm: 

firms that work on-site at the client firm and for one client. \V'orkers for contractor firms may work for multipk~ clients 

(as may be the case for a janitor) or offsite (as may be the case at a call center), ).loreovcr, some workers may not be able 

to accuratdy identify their employer. See Bernhardt 2018. For a look at the issues in measuring contract employment and 

other forms of fissured work, see Annette Bernhardt el aL, "Domestic Outsourcing in the United States: A Research 

Agenda to Assess Trends and Effects on job Upjohn Institute, Cpjohn Institute W'orking- Paper 16-253,2016, 

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Another study found that the share of workers in computer occupations employed by businessservices firms grew from 39 percent in 1990 to over 50 percent a decade later. 29 

A study by a Bureau of Labor Statistics economist measures outsourcing by calculating the 

concentration of workers in the same occupation at the same worksite, because such concentration 

makes it likelier that these workers work for a contractor rather than a lead firm. For example, an IT 

worker employed at a workplace where most other workers also are IT workers is likelier working 

for an IT contractor than one who works at a worksite where workers have a wide range of 

occupations. The study finds this type of concentration grew between 1999 and 2015."' Bloomberg 

recently reported that contractors at Alphabet Inc., the parent company of Google, outnumber 

direct employees.31 

The pass-through deduction could prompt even more firms to embrace these arrangements. 

Consider a firm deciding whether to retain its 20-person IT department or hire an outside contractor 

firm to provide 20 IT staff to do the same work with the same management structure. The IT 

department has five managers: one makes $300,000 and four make $150,000, for a total cost of 

$900,000. They aren't eligible for the pass-through deduction. The owner-managers of the 

contractor firm, however, are eligible for it. The latter can earn the same take-home pay as the inhouse managers while only charging the firm about $839,000- 7 percent less for their services 

because of their lower tax rate from the pass-through deduction. That enables the contractor firm to 

charge a lower price, effectively sharing some of the tax savings with the lead firm in order to win its 

business. 

Franchises 

Under franchising, a lead firm sells an independent business O\V"'ler the right to use its name, 

techniques, materials, and more in operating a business. Again, we have no good estimate of the 

share of workers employed by franchises, but the trade association representing franchises says that 

8 million people work for franchises, and it expects franchise employment to grow t\vice as quickly 

as overall employment in 2018.:u 

Matthew Dey, Susan N. Houseman, and Anne E. Polivka, "\X:hat Do \X'e Knmv about Contracting Out in the United 

States? Evidence from Household and Establishment Surveys," Katharine G. Abraham, 

James R. Spletzer, and :VIichaei.J. Harper (Cniversity of Chicago Press, 2010), pp. 

l~ For the purposes of this section, we assume that the managers have negotiated sufficient additional compensation to 

make up for the loss of their own benefits mentioned above. Their failure to do so would add to the potential employer 

savings from outsourcing. 
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The pass-through deduction encourages franchising because it enables a lead firm to generate cost 

savings similar to those described abo,· e. Instead of opening its own branch with its own \Vorkers, 

the lead firm can open a franchise \vhere one or more managers own the new establishment but pay 

a royalty to the lead firm's owners. The lead firm can set the royalty so that the firm is effectively 

paying the franchise owners less than if they were in-house managers, even though the after-tax 

earnings of both are the same because of the deduction. 

Contracting and Franchising Can Harm Rank-and-File Workers 

The incentives for lead firms to rely more on outsourcing to contractor firms or expand through 

franchises also affect rank-and-file \vorkcrs: rather than work for lead firms, they would work for the 

contractor firm or franchise .. Many of them could end up worse off, with lower wages and few·er 

benefits. 

Outsourcing reduces wages by 4-7 percent for janitors and by 8-24 percent for security guards, 

while reducing health insurance benefits for both, one study found.·q Other studies have found 

slmilar rcsults. 15 These workers also may have fewer chances for training or career advancement.36 

Labor-law violations are more common at restaurants and hotels that are franchises. Franchiseowned fast-food restaurants were 24 percent likelier to violate labor laws than those owned by the 

lead firm and the hack wages they owed workers were 50 percent higher per violation, one analysis 

found." 

Pay and benefits tend to be lower at franchises or contractor firms for several reasons, including: 

• Inequality among a firm's employees can reduce productivity and morale/8 so large profitable 

firms may choose to pay above-market wages to their lower-wage employees to reduce 

inequality within the firm. These tirms, however, can cut labor costs Jl'ithout increasing 

inequality within the firm by moving these jobs to a contractor or a franchise paying lower 

wages . 

. H Arindrajit Dube and Ethan 1-\:.aplan, "Docs. Outsourcing Reduce \Xlages in the Low-\Xlagc Service Occupations? 

Evidence from Janitors and Guards," Industrial l .abor Rdations Rrvien', Vol. 63, ~o. 2, 2010. 

13 Katharine G. Abraham and Susan K. Taylor, "Firms' Cse of Outside Contractor;;;: Theory and Evidence," ]ot~mal of 

194~424; Samuel Berlinski, "Wages and Contracting Out: Does the Law of 

46, No.1, 2008, pp. 59-75; Dorn, Schmieder, and Spletzer. 

Employers in the lJnited 

Rn;ieJll, VoL 69, No.2, 2016, pp. 405-434. 

122-158; David W'eil and Min \'V'oongJi, "Does Ownership Structure 1ntluence Regulatory Behavior? The 

Labor Standards Compliance," lndu.ftn'al ami 1-tJhor Rdtttion.r Rerim', VoL 68, ~o. 5, 2015, pp. 

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• Firms have limited authority, under the law, to offer benefits such as health insurance or paid 

leave to some employees but not others.39 By using franchises or contractor firms, lead firms 

can eliminate benefits for certain groups of workers by shifting those jobs outside the firm. 

• Franchises and contractors make it easier for a lead firm to avoid various labor protections. 

Lead firms can set a contractor firm's prices so low, or a franchise's royalties so high, that they 

may find it hard to make a profit without violating some labor laws. The lead firm, meanwhile, 

avoids the legal or reputationalliability from such violations.40 Lead firms also can use 

contractors to avoid having a unionized workforce, which would cost more.41 

Workplace Fissuring May Be Increasing Wage Inequality 

Worl<place fiSSuring may have contributed to the increase in wage inequalitY over the 'last fell\' decades, 

growing evicjence suggests: 

• One study found that about two-thirds of the increase ln earnings inequality between 197tl and.2013 

reflects growing inequality between workers at different firms, as opposed to woll«itl> attne sama firm.• 

The authors tied most of this increase to high-earning worl<ers increasingly worl<ing at firms that !J6Y 

higher average wages, and being increasingly less fikely to wor1< with low-wage workers, Another paper 

found similar results among worksites.• that's oonsiSteot with the idea that large, profilabll! firms 

increasingly outsource the services of low· and tniddl&wage workers, pushing them Into Jow.wage firms 

that pay lower wages. 

• A study about Genmany fOund that when employers outsource jobs, wages fat! 1<H5 percent compared 

to similar jobs that weren't outsotlrced.'lt also found that the outsourcing of cleaning, securitY, aod 

logistics services alone accounts for about 10pereentotthe lrtcrease In 'German wag., ;nequaHty since 

the.1980s. A preliminary study using the same methl)dofogy also found wage declines in the United 

States that resulted from outsourcin!!,• 

• The study, noted above, which found an lncrease in dutsouicing between 1999 and 2015-: measured 

by the concentretlon of workers In the same oocupattonattha same worksltee 7 a!SP determined that 

thi$ growing occupational concentration helps explajn a substantial. portion of growing wage Inequality 

over that period. 

• Jae Song eta/., "firming Up Inequality; forthcomlngQuarter/yJoumal of Economics, 

lJltps:/lfg;uvE:inendotcom.f~,,):YOfdpre:SS_,&QillL2Ql.~tul, 'Ole ~ttft]!Pteq pdf., 

• Erling Barth et al., "It's Where You Work: Increases in the Dlspe'rsion of Earnings across Establishments and Individuals 

in the United States; Journal of Labor Economics, Vel. 34, No.2, 20:1.6. 

'Deborah Goldschmidt and Johannes F. SChmieder, "The Rise<>! Domestic Outsourcing ail<! the Evoluijon oftlle Gennan 

Wage Structure; QuarterlY Journal of Economies, Vol. 132, No. 3, 2017, pp. 1165-1217. 

d Dornt Schmieder, and Spletzer. 

e Handwerker . 

.>'> \'X"eil, p. 78. 

*'Weil,pp.lOS, 112,139-142. 

41 Weil, pp. 101-107. 

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Pass-through Deduction's Guardrails Won't Prevent Workplace Fissuring 

Under last year's tax law, the pass-through deduction has "bruardrails" that appear intended to 

prevent workers from recharacterizing their wages and salaries to the deduction. But they may 

turn out to be largely ineffective at preventing workplace fissuring. 

One guardrail, for example, denies the deduction to individuals in certain "'personal services" 

industries (such as medicine, law, accounting, consulting, financial services, and athletics) if they 

make over $157,500 ($315,000 for a married couple). But the overwhelming majority of workers 

make less than $157,500 (including most accountants and lawyers) and could therefore become 

independent contractors regardless of industry.43 The O\vner of a contractor firm or franchise, by 

contrast, would be likelier to have an income above the thresholds. But the list of industries in which 

high earners cannot get the deduction omits many industries that are especiatly likely to include 

contractor firms, such as IT and payroll. J\foreover, franchising could spread in rhe long list of 

industries that are eligible for the deduction. 

Another guardrail limits the size of the deduction for high-income business owners to a 

percentage of the wages the firm pays or the value of the property it owns. But that won't likely 

prevent many contract firm or franchise owners from receiving the full deduction, as the thresholds 

are relatively high. This guardrail only limits the deduction if the firm's profits are more than 250 

percent as large as the wages the firm pays (a firm that does not meet this requirement can use 

another formula that also includes the value of property in addition to wages). 44 Yet, the averageScorporation's profits are only 61 percent as large as the wages jt pays, according to lRS data.4

'> ln the 

administtati\·e and support services industry- the industry many contractor firms likely fall under 

~the averageS-corporation's profits are only 25 percent as large as the wages it pays. In those 

cases when the wage guardrail is binding, an S-corporation's owners can increase the wages they pay 

themselves in order to increase the deduction allowed for the remaining profits.4

r' 

It's hard to know what the authors of the 2017 tax law intended because of"the lack of any underlying logic in 

deciding who benefits from the pass-through deductions, and \vho does not." Da..-id Kamin et aL, "11w Games They 

\Viti Play: An Cpdatc on the Conference Committee Tax Bill," SSRN, December 28,2017, 

In fact, 90 percent of workers make less than $96,000. L'.S. Bureau -of Labor Statistics, "Occupational Employment 

Statistics," 2018. I'or the other professions, see the median salary numbers cited abo\·e. 

44 A firm's high -income owner can receive the full deduction equal t<) 20 percent of profits if that amount is equal to 50 

percent of the wages and it is nor in one of the industries denied the deduction. The owner of a firm \V1th $1 

million in profits can, receive the full $200,000 deduction if the firm pays at least $400,000 in wages. 

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Recent IRS guidance may actually encourage contracting out. Last year, tax experts identified a 

strategy known as "cracking" by which high earners could potentially receive the deduction, even in 

industries that are not supposed to be eligible.47 Under it, a firm can split itself into pieces, and 

income from the pieces that aren't in industries barred from getting the deduction could get it. A law 

firm, for example, could spin off its payroll department into a separate company that charges the law 

firm for its payroll services. This payroll service income would then be eligible for the deduction, 

while the law firm's income from legal work would not. The recent IRS guidance rightfully makes it 

harder for firms to crack but does nothing to prevent firms from capturing tax savings by 

contracting out. (The difference is that under cracking, the owners of the original firm typically own 

each of the pieces, unlike with contracting.) Thus, the IRS guidance makes contracting out more 

attractive.48 

Deduction an Inefficient Way to Increase Entrepreneurship 

Together, the pass-through deduction's tax incentive for workplace fissuring and the failure of its 

guardrails to prevent it could shift employment further toward independent contracting, contractor 

firms, and franchises. On paper at least, that could mean a large number of new businesses. Yet 

that's hardly the sort of entrepreneurship that leads to innovation and job creation. Instead, it just 

means that existing firms are splitting up to capture the tax savings created by the deduction 

(thereby costing more in reduced federal revenue) and, in some cases, also to reduce their labor costs 

(thereby increasingly putting downward pressure on wages). 

Many economists across the political spectrum view the pass-through deduction as unwarranted 

and inefficient for various reasons. This aspect of the deduction- the shift to fissured workmay compound the economic inefficiency. Firms may further shift their employment practices 

toward these arrangements to secure the tax cut. But part of these gains may be offset by 

inefficiencies that fissuring can produce. Firms surrender control over their workers when they no 

longer employ them directly; they may, for example, be less able to maintain product quality and 

prevent delays.49 Technological and organizational innovations have made it easier for lead firms to 

maintain control, but until now they have only needed to weigh fissuring's labor savings against its 

potential inefficiencies. The pass-through deduction, however, effectively puts a thumb on the scale 

in favor of fissuring by offering tax savings as well. 

Rather than create an inefficient tax break that increases inequality, policymakers who want to 

boost entrepreneurship should focus on real barriers to entrepreneurship. The ACA, for example, 

did that by enabling millions of Americans to obtain affordable, quality health coverage in the 

marketplace independent if an employer, making it less costly and risky for them to start their own small 

47 Kamin etaL 

48 Kamin. 

49 Weil, p. 60. See also Oliver Williamson, '<'fhe Theory of the Firm as Governance Structure: From Choice to 

Contract," Journal of Economic Perspectives, Vol. 16, No.3, 2002, pp. 171-195; Ronald Coase, "The Nature of the Firm," 

I:::conomica, Vol. 4, No. 16, 1937, pp. 386-405. 

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business. The ACA's marketplace reforms mean that 1.5 million more people are self-employed than 

otherwise, Urban Institute and Georgetown University health researchers estimate?1 

The 2017 tax law itself threatens to reverse at least some of these gains for some small business 

owners and self-employed people by repealing the ACA's individual mandate; the Congressional 

Budget Office estimates that that will increase health insurance premiums in the individual market 

by 10 percent. 51 Small business owners and the self-employed disproportionately rely on this market. 

The higher costs may not just hurt them financially but could also encourage them to become 

traditional employees at a firm that offers health care, even if they would prefer to own their own 

businesses or work for themselves. 

Conclusion: Pass-Through Deduction May Further Encourage Harmful Labor 

Market Trend 

The implications of fissured workplaces for workers have received increased attention in recent 

years. In some cases, pol.icymakcrs have acted to counter this trend or mitigate its effects. The 

Obama Administration, for example, issued a rule (known as a "joint employer standard") on 

whether a lead firm has responsibility to comply with labor law when it directs a group of workers 

employed by another firm. 52 The Obama Administration also made it harder for firms to misdassify 

employees as independent contractors, and it attempted to update federal overtime n1les so that 

they covered more workers. 5

·

1 The Trump Administration has sought to reverse progress in these 

areas by rescinding or re-wr1ting those rules. 

In short, the new pass-through deduction moves tax policy in the wrong direction. It may push 

more workers into low-wage firms or put them outside the protections of labor laws, while 

weakening their employer-provided benefits. 1bat's one more reason that policymakers should undo 

this serious policy mistake and repeal the pass-through deduction. 

5l1 Blumberg, Corlettc, and Lucia, 2013. 

"2 C.S. Department of Labor, ':Joint employment under the Fair Labor Standards Act and i\figrant and Seasonal 

Agricultural w·orker Protection Act," 2016, 

13