Associated Press
During the fierce congressional debates that led to the passage of the 2017 Tax Cuts and Jobs Act, advocates and opponents of the proposal agreed on one thing: The once-in-a-generation bill, under the helm of President Donald Trump, would profoundly change how the United States raised tax revenue. Proponents declared that the proposal would give private enterprise, wages, and American competitiveness such a boost that it would fill in much of the revenue gap created by lowering tax rates. Detractors argued that the legislation favored the rich and would send the federal deficit soaring.
An analysis of the tax cuts by Harvard’s Gabriel Chodorow-Reich, Princeton’s Owen Zidar, and Chicago Booth’s Eric Zwick finds that the TCJA has boosted investment, as well as wages and economic activity—but not nearly enough to make up for substantial losses in corporate tax revenues that have increased the deficit.
The researchers offer their findings as lessons for lawmakers who are facing a fresh round of tax battles. In a flourish of Washington political engineering, backers of the 2017 law lowered projections of its future cost by setting many provisions to expire in 2025. Renewing all the provisions might be politically expedient but expensive, they caution.
The 2017 tax law, often called the “Trump Tax Cuts,” represented the biggest business tax cut in US history and landed at a time when the status of America’s business tax regime had changed dramatically relative to peer countries. In 1988, the top US corporate tax rate of 34 percent was the second lowest among seven leading industrialized economies. However, the six other countries all cut their top rates over the years that followed, leaving the US with the highest levies among the group as lawmakers debated the TCJA.
The TCJA cut the top statutory tax rate on corporate income from 35 to 21 percent and allowed companies to write off equipment purchases immediately (rather than depreciating them more slowly). It included a deduction designed to encourage companies to locate intangible capital, such as intellectual property, in the US. It also eliminated the corporate alternative minimum tax; and changed how foreign-source income is taxed. Lastly, to offset some of the law’s costs, the TCJA eliminated C corporations’ ability to reduce prior-year taxes with “carry back” losses.
The researchers acknowledge that the rates and methods the government uses to tax businesses invariably involve trade-offs with profound effects on the economy and wealth distribution. Taxing business income directly generates substantial tax revenue. It also reduces the scope of tax avoidance and evasion by limiting the gamesmanship that takes place when there’s a gap between tax rates on capital and labor income. A system that closes avenues for business owners to pay lower tax rates than their workers improves economic equality. And taxing corporate income provides an indirect way of raising revenue from foreigners, nonprofits, pensioners, and others, who collectively own three-quarters of US equity but are exempt from dividend and capital gains taxes.
On the downside, taxing business income tends to weigh on the economy. It does so by reducing the incentive to accumulate capital and start new businesses or expand existing ones. That, in turn, lowers national income.
Lower rates lead to less revenue
A model of the 2017 Tax Cuts and Jobs Act, assuming its provisions are made permanent, predicts that over the first decade, gains in tax revenue from higher wages and changes in business behavior (such as increased investment) are too small to offset the revenue loss from the lowered corporate tax rate.
With these pluses and minuses in mind, the researchers developed a framework for assessing the tax cuts’ actual effects. They summarized what is currently known about the costs and benefits of the legislation and the implications for future US tax policy, building on empirical work on how the law has affected domestic tax revenue, private sector investment, and GDP—and how that compares with policymakers’ predictions. Among the research they cite is a paper by Zwick and coauthors that finds, among other things, that the law reduced corporate tax revenue by 40 percent.
Companies that enjoyed larger cuts invested more than companies that saw less tax relief, increasing their total tangible corporate investment by 8–14 percent, the researchers write. Also, changes made to the taxation of foreign income had domestic implications. For example, US multinationals that benefited also boosted domestic operations.
But these benefits were dwarfed by forgone tax revenue, according to the researchers. Additionally, while the Council of Economic Advisers had predicted the TCJA would benefit full-time employees by up to $9,000 on average (in 2017 dollars), the researchers indicate it actually produced a wage boost that averaged $750. Long-term GDP grew by less than 1 percent annually, they find.
The researchers note that the government’s fiscal picture has worsened since the passage of the tax cuts. Extending most or all of the expiring and expired provisions while letting the rate cut for corporations remain would be costly relative to the growth it would buy, the researchers write, especially given the substantial rise in interest rates over the past seven years. Among the risks of extending costly provisions is the prospect that government deficit financing will crowd out investment, complicating the Federal Reserve’s mandate of seeking low inflation and full employment.
As policymakers consider their options, the researchers note that some of the provisions on the chopping block—such as accelerated depreciation—generate more economic value per dollar of tax revenue than others. In contrast, tax cuts for closely held pass-through businesses look expensive based on the relatively small amount of investment they encourage and the incentives they give business owners to recharacterize high-tax labor income as business income. They also are regressive, delivering the biggest gains to the highest earners.
- Gabriel Chodorow-Reich, Owen Zidar, and Eric Zwick, “Lessons from the Biggest Business Tax Cut in US History,” Working paper, July 2024.
- Gabriel Chodorow-Reich, Matt Smith, Owen Zidar, and Eric Zwick, “Tax Policy and Investment in a Global Economy,” Working paper, March 2024.
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