The Tax Cuts and Jobs Act (TCJA)

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The Tax Cuts and Jobs Act (TCJA)
Article Overview
The article titled “The US Senate passed the massive Republican tax bill in the middle of
the night -- here's what's in it” from Business Insider by Bob Bryan on December 3rd, 2017 talks
about the changes to be made in personal and businesses taxes in the United States. The Senate
has endorsed the Tax Cuts and Jobs Act (TCJA) that is going to cause significant alterations in
the Federal tax code. The changes in tax law will affect both individuals and businesses (Bryan).
For instance, on personal tax brackets, the Act seeks to sustain the current brackets but reduce
the tax rates and also alter the income levels of respective tax brackets.
Furthermore, the business will benefit from the changes brought by the Tax Cuts and
Jobs Act. For example, the corporate tax will be reduced to 20 percent in 2019 from the previous
rate of 35 percent. This legislation will also permit the companies to deduct business expenses
entirely (Bryan). The purpose of these changes by Trump’s administration is to enhance the
economic growth of the United States and increase employment.
Economic Analysis
Expansionary Fiscal Policy

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The fiscal policy comprises of variations in taxes as well as government expenditure to
control economic growth. The fiscal plan can either be expansionary or contractionary
(Blanchard and Johnson 84). The expansionary fiscal policy incorporates a reduction in
taxes and an expansion in government expenditure and causes a rise in the aggregate demand.
Conversely, contractionary fiscal policy entails a hike in taxation and a reduction in government
expenditure (Hubbard and O'Brien 75). Since the Tax Cuts and Jobs Act involve a cut in
taxes, it is an expansionary monetary policy.
Impact on Tax Cuts and Jobs Act
A decline in individual taxes will increase the disposable income of households in the
United States. A rise in the disposable income of consumers will, in turn, lead to a surge in
consumption expenditure (Sloman, Wride and Garratt 63). Furthermore, allowing the firms
to deduct expenses fully will encourage more investments and thus culminate in a rise in
investment expenditure. A surge in consumption expenditure, as well as investment spending,
will trigger an expansion in the aggregate demand.
On the figure one below, an expansion in the aggregate demand is exhibited by the
change in the aggregate demand curve from AD to AD0. This change in the aggregate demand
curve initiates a rise in both the price level and the real output. The price level expands from P1
to P2 whereas the real Gross Domestic Product (GDP) surges from Y1 to Y2.