The Tax Cuts and Jobs Act (TCJA) of 2017 significantly overhauled the U.S. tax code, primarily by reducing the corporate tax rate from 35% to 21% and lowering individual tax rates across most income brackets. It also increased the standard deduction while eliminating personal exemptions and limiting deductions for state and local taxes. Additionally, the TCJA introduced measures to encourage repatriation of overseas profits and included provisions aimed at simplifying the tax filing process for many taxpayers.

In our recent article, we assess the business provisions of the TCJA, which represented the largest corporate tax cut in U.S. history. There are five key lessons of our analysis:

1. Revenue Impact: The corporate tax cut was expensive, reducing corporate tax revenue by about 40% compared to pre-reform levels. This significant decline in revenue highlights the substantial fiscal cost of the reform.

2. Investment Response: Firms that experienced larger declines in their effective tax rates increased their investment relatively more. We suggest a loose consensus from the literature that total tangible corporate investment increased by approximately 11% due to the TCJA. This positive investment response, while notable, was not large enough to offset the direct cost of the reform.

3. Economic Growth and Wages: The business tax provisions increased economic growth and wages, but by less than advertised by the Act’s proponents. We estimate that long-run GDP increased by less than 1%, and labor income rose by less than $1,000 per employee. This is significantly lower than the $4,000 to $9,000 range predicted by the Council of Economic Advisers before the law’s passage.

4. International Provisions: We find that provisions that increase foreign investment by U.S.-based multinationals also boost their domestic operations. This finding indicates that foreign and domestic investment for multinational firms can be complementary.

5. Efficiency of Different Provisions: Some of the expired and expiring provisions, such as accelerated depreciation, generate more investment per dollar of tax revenue than others. This finding has implications for future tax policy design.

We provide a framework for understanding the effects of corporate taxes on investment and wages. Tax incentives for investment can be summarized by two parameters: the marginal tax rate on income from new investment and a cost-of-capital subsidy that incorporates depreciation deductions and investment tax credits.

We then discuss several methodological approaches to estimating the effects of the TCJA:

1. Cross-sectional analysis comparing firms with different exposure to the tax changes.
2. Comparison of U.S. firms to similar non-U.S. firms.
3. Comparison of aggregate investment to pre-reform forecasts.

These approaches consistently show a positive effect on corporate investment, with estimates ranging from 8% to 14%. Since aggregate investment stayed on its pre-reform trend, these estimates suggest that investment would have declined in the absence of the TCJA.

Regarding the impact on GDP, we estimate a long-run increase of roughly 0.9%. This translates to an increase in the growth rate of GDP of approximately 0.1 percentage points per year over a 10-year horizon. The corresponding increase in wages is estimated to be less than $1,000 per employee, far smaller than the $4,000 to $9,000 predicted by the Council of Economic Advisers.

We also evaluate the effects of individual provisions of the TCJA:

1. Reduced corporate tax rates: This provision increased investment but was the most expensive in terms of cost per unit of capital accumulation.
2. Expensing: This increased investment and delivered about half the capital accumulation of the rate cut for one-third of the cost.
3. Limiting interest deductions: This had no significant effect on investment but raised tax revenue.
4. Global Intangible Low-Taxed Income (GILTI): This modestly boosted domestic capital accumulation while also raising revenue.
5. Foreign Derived Intangible Income (FDII): The overall effect on investment was ambiguous, but it likely reduced tax revenue.

Looking forward, we note that many provisions of the TCJA are set to expire, which will create pressure to revisit these topics.  Policymakers should consider that some provisions, such as accelerated depreciation, generate more investment per dollar of tax revenue than others. Moreover, the current fiscal and interest rate environment differs significantly from when the TCJA was passed, which may affect the trade-offs involved in future tax policy decisions.

In conclusion, while the TCJA did stimulate business investment and economic growth, its effects were more modest than initially predicted by its proponents. The significant reduction in corporate tax revenue and the varying efficiency of different provisions highlight the complex trade-offs involved in corporate tax policy design.