TCJA Extension Might Not Pay for Any of Itself

Despite claims that tax cuts pay for themselves, analyses from across the political spectrum have found that the economic effects of extending the expiring parts of the Tax Cuts and Jobs Act (TCJA) would offset 1 to 14 percent of the revenue loss – falling well short of the 100 percent needed to pay for itself. New data from the Congressional Budget Office (CBO) finds that economic feedback may not cover any of the revenue loss and that TCJA extension might even add more to the debt on a dynamic basis, particularly over the long run, than under conventional scoring.

In a slide deck and accompanying data, CBO outlines the fiscal and economic effects of extending the individual income tax provisions of the Tax Cuts and Jobs Act (TCJA),¹ which they estimate would add $3.7 trillion to the debt (with interest) through Fiscal Year (FY) 2034. CBO finds that “the dynamic budgetary effects of [TCJA] expiration … would be very similar to the conventional estimate,” as the positive effects of lower taxes would be counteracted by the negative effects of higher debt.

Importantly, CBO’s analysis only looks at extending the expiring individual provisions, and not certain business and estate tax provisions which might do relatively more to boost economic growth (but not nearly enough for extension to be self-financing).

CBO estimates that extending the expiring individual TCJA provisions would increase output by an average of 0.1 percent from FY 2025 through 2034 while boosting interest rates on ten-year Treasuries by an average of 0.06 percent. Assuming the additional output is taxed at an average rate of 25 percent, it would produce about $90 billion of positive revenue feedback. However, assuming all bond yields rose in concert with ten-year Treasuries, those higher interest rates would add $150 billion to the debt, more than counteracting the revenue gains.²

While CBO finds that lower tax rates would improve economic growth over the short term by supporting stronger near-term demand and increasing the incentive to work, the higher debt resulting from the unpaid-for tax cut extension would ultimately counteract this effect by crowding out and thus reducing investment.

After peaking at about 0.3 percent in FY 2027 and 2028, CBO estimates the boost to economic growth from extending TCJA’s individual tax provisions without offsets would begin to decline by about 0.06 percent per year and would eventually turn negative. By FY 2034, Gross Domestic Product (GDP) would be 0.08 percent lower than under the current law baseline.

At the same time, CBO finds the “crowd out effect” of the increased borrowing under a non-offset TCJA extension would meaningfully boost interest rates over time. Specifically, CBO projects interest rates on ten-year treasuries would be 0.05 percentage points higher by FY 2030, 0.08 percent higher by 2034, and growing at a rate of roughly 0.008 percent per year.

With such a large and rapidly growing stock of federal debt, even modest increases in interest rates significantly boost federal interest payments and additional borrowing.

Some important caveats are necessary in understanding CBO’s analysis. First, their analysis is meant to represent the midpoint of a range of likely outcomes – reasonable estimates could conclude somewhat more or less favorable economic outcomes. Second, CBO’s analysis focuses only on the extension of individual income tax provisions. Extending the estate tax and business provisions, such as 100 percent bonus depreciation, may prove to have stronger economic growth effects and perhaps weaker interest rate effects.

Third and most importantly, CBO’s analysis assumes extensions are debt financed – with this higher debt both holding down the positive growth effects and pushing up interest rates. As we’ve shown, there are numerous ways to ensure a TCJA extension – or a broader fiscal package which includes a TCJA extension – is deficit neutral or debt-reducing. Several plans already exist for how to extend the TCJA in a fiscally responsible way, and analyses suggest such extensions could significantly boost long-term economic output.

In order to maximize the economic benefit of extending TCJA while minimizing the potential fiscal and economic costs, policymakers should commit to reducing deficits as part of any extension.

1 CBO’s slide deck outlines their estimates of the fiscal and economic effects of not extending the expiring provisions of TCJA against an alternative baseline in which all provisions in the TCJA are permanent. We assume the inverse of these findings represent the estimated effects of extending the TCJA against a current law baseline in which expiring provisions are allowed to expire.

2 These figures are rough estimates based on rules of thumb. Using the data underlying the various charts in CBO’s slide deck, we converted the GDP increase into dollars – about $350 billion – and assumed one-quarter of those dollars would be collected in tax revenue. Meanwhile, we input the interest rate changes into CBO’s Workbook for How Changes in Economic Conditions Might Affect the Federal Budget to calculate interest rate effects. Neither figure reported above includes “debt service” effects – the changes in interest payments as a result of changes in the level of debt – nor do they account for interactions between the extension of the tax cuts and the effect of changes in revenue or debt.