Economic Analysis of the Tax Cuts and Jobs Act in the US

This report provides an economic analysis of the Tax Cuts and Jobs Act (TCJA), focusing on its impact on the US economy. The report begins with an overview of the TCJA, which includes changes to personal and business taxes. It then delves into the fiscal policy implications, identifying the TCJA as an expansionary fiscal policy due to its tax cuts. The analysis examines the effects of these cuts on aggregate demand, demonstrating how increased disposable income and investment incentives can stimulate consumption and investment expenditure, leading to a rise in aggregate demand. The report also explores the impact on short-run aggregate supply, explaining how the reduction in business taxes acts as a positive supply shock. The report utilizes figures to illustrate the shifts in aggregate demand and short-run aggregate supply curves, and concludes that the TCJA aims to enhance economic growth by influencing both aggregate demand and supply.

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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.

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PL
Real Output
Figure 1: Rise in Aggregate Demand
Apart from a rise in the aggregate demand, we also anticipate a growth in the short run
aggregate supply due to a reduction in business taxes. Business taxes entail taxes on profits of
businesses and are taken as the cost of production by the companies (Frank and Bernanke 67).
Therefore, changes in business taxes cause supply shocks to the economy. When the supply
shock is positive, it triggers a rise in the short-run aggregate supply. On the other hand, when the
supply shock is adverse, it culminates in deterioration in the short-run aggregate supply
(McTaggart, Findlay and Parkin 75). Since the Tax Cuts and Jobs Act propose a cutback in
corporate taxes, it will act as positive supply shock and therefore cause a rise in the short-run
aggregate supply.
P2
AS
P1
AD0
AD
Y2Y1
T
H

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PL
Real Output
Figure 2: Surge in the short-run aggregate supply
On figure two above, the expansion in the short run aggregate supply is exhibited by the
shift in the short run aggregate supply curve from AS to AS1. This shift leads to a drop in the
price level and a rise in the real Gross Domestic Product. The price level drops from P2 to P1
while the real GDP expands from Y1 to Y2.
In conclusion, the Tax Cuts and Jobs Act is one of Trump’s administration policies
targeting to enhance the economic growth of the United States. This legislation proposes
significant alterations in the personal as well as business taxes. The reduction in individual taxes
will lead to a rise in the aggregate demand and triggers a surge in the price level and real output.
Moreover, a cut in corporate taxes will act as a positive supply shock and hence lead to a rise in
the short-run aggregate supply.
AS AS1
P2
P1
AD
Y2Y1

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Works Cited
Blanchard, Olivier and David R Johnson. MACROECONOMICS. Boston : Pearson, 2013.
Bryan, Bob. The US Senate passed the massive Republican tax bill in the middle of the night --
here's what's in it. 3 December 2017. 29 April 2019.
<https://www.businessinsider.com.au/whats-in-senate-trump-gop-tax-reform-bill-
brackets-deductions-rates-2017-12>.
Frank, Robert H and Ben S Bernanke. Principles of macroeconomics. New York, N.Y: McGraw-
Hill Irwin, 2011.
Hubbard, R Glenn and Anthony Patrick O'Brien. Macroeconomics. Boston ; Montreal : Pearson,
2013.
McTaggart, Douglas, Christopher C Findlay and Michael Parkin. Economics. Frenchs Forest,
N.S.W: Pearson, 2015.
Sloman, John, Alison Wride and Dean Garratt. Economics. 9th. Harlow : Pearson, 2015.