By Oliver Pardo
This paper assess the macroeconomic and welfare effects of the 2017 tax reform in the US. This assessment is carried out by simulating the enacted business tax cuts in a dynamic general equilibrium model calibrated to replicate the household income distribution in the US. The simulation suggests that the cuts will lead to increases in investment, wages and output, although the welfare gains are quite unevenly distributed across households. Long-run investment increases by one percentage point of the baseline GDP, leading to a 1.3% increase in the steady-state wages and a 1.7% increase in the steady-state output. However, there is a sudden and permanent drop in tax revenue equivalent to 0.5% of the baseline GDP. The necessary cuts in government spending imply that households in the poorest quintile may face a welfare loss equivalent to 1.6% of the GDP. Mean-while, households in the richest quintile can expect a gain of 4.4% of the GDP. Overall, the welfare gains of all households add up 4.7% of the GDP. Hence, the aggregated welfare gains from all but the richest quintile is barely positive.
While the results are hardly surprising, it is nice to see a first evaluation of this tax policy using serious modeling. There should be more of it.