The Tax Cut and Jobs Act (TCJA) of 2017 was based on the idea that lower corporate and corporate tax rates, new domestic investment incentives, and guard rails against international profit shifting would increase investment, increase worker productivity, and ultimately increase production and wages.
Did it work? In a new paper with my colleague at the Tax Policy Center, Claire Haldeman, we conclude that, in line with these goals, TCJA is reducing the marginal effective tax rates (METRs) on new investments and reducing the differences in METRs between asset types, funding methods and organizational forms Has .
But it had little impact on business investment through 2019 (which is when we stopped analyzing to avoid confusing TCJA effects with those of the following COVID-related closings). Investment growth picked up after 2017, but several factors suggest it was not a response to changes in the TCJA’s effective tax rates.
First, the timing of the investment reaction did not coincide with a supply-side reaction. Much of the surge in investment has been in oil and related industries and appeared to be a response to rising oil prices rather than lower tax rates. In fact, other investment did not grow very strongly, and even overall investment growth slowed until the end of 2019.
Investment growth across all types of assets such as equipment, structures and intellectual property did not correlate with legal changes to the METRs. The types of capital with the strongest tax cuts also recorded the lowest investment increases.
In addition, the growth rate of business start-ups did not increase after TCJA, and surveys suggest that only a small minority of businesses made TCJA-induced investments. Employment growth and median wages slowed in 2018 and 2019 compared to the years prior to the 2016 and 2017 TCJA. The much-touted bonuses some companies gave their employees in late 2017 were tiny in relation to wages. And they seem to have been primarily motivated by political considerations or the ability for companies to accelerate their payments through 2017, when the cost could be deducted from a corporate tax rate of 35 percent, rather than in 2018 when the deduction was just 21 cents on the dollar .
TCJA’s impact on GDP growth is more difficult to determine. The economy grew faster after 2017 than predicted before TCJA, but many other factors also affected the economy between 2017 and 2019.
Despite the ardent claims of its supporters, TCJA reduced federal revenues significantly compared to what would have been achieved if the law had not been passed. That is, it never came close to the Laffer Curve’s promise that supply-side tax cuts would generate so much economic growth that they would increase tax revenues.
Despite the substantial reduction in the corporate tax rate and the new regulations aimed at cross-border tax avoidance, TCJA has only marginally reduced international profit shifting. And it had little impact on US firms’ efforts to reduce their US tax liability by being acquired by a company based in a lower-tax country.
The TCJA provision, which allowed firms to return foreign profits to the US without paying US taxes, resulted in a one-time increase in repatriated funds. But instead of boosting investment or wages, it sparked a wave of company stock buybacks.
Our study comes with several caveats. First, it’s not always easy to create a compelling story of what the economy would have been like without TCJA. This is particularly true of GDP growth, where the supply side effects of TCJA have been distorted by increases in TCJA disposable income and concomitant changes in oil prices and monetary and fiscal policies. President Trump’s aggressive tariffs made it particularly difficult to tease out the effects of the TCJA.
Second, by analyzing the results only through 2019, we have only focused on short-term impacts, which can be a poor guide in the long-term. Short-term growth momentum is typically dominated by changes in aggregate demand, while long-term growth comes from changes in supply.
Both experts and proponents emphasize that the supply-side process can take a long time to be fully effective.
Overall, those in favor of the TCJA promised many supply-side benefits and promised that they would materialize quickly. But for at least the first two years, the law failed to deliver on its promises of investment and growth, leaving the country with higher deficits and a less even distribution of after-tax income.
Read the full report here.