The corporate tax cuts signed by President Donald J. Trump into law in 2017 boosted investment in the US economy and led to a modest increase in workers’ wages, according to the most rigorous and detailed study to date of the law’s effects.
Those benefits are less than Republicans promised, however, and come at a high cost to the federal budget. The corporate tax cuts didn’t come close to paying for themselves, as conservatives insisted they would. Instead, they add more than $100 billion a year to America’s $34 trillion and growing national debt, according to the quartet of researchers from Princeton University, the University of Chicago, Harvard University and the Treasury Department.
The researchers found that the cuts produced wage gains that were “an order of magnitude below” what Trump officials had predicted: about $750 per worker per year on average over the long term, compared with promises of $4,000 to $9,000 per worker. .
The study is the first to use massive data from corporate tax returns to draw conclusions about the Tax Cuts and Jobs Act, which passed only with Republican support. Its findings could help shape the debate about renewing parts of the law that are about to expire or have begun to be phased out.
This includes a key provision targeting investment, which the authors identify as the most cost-effective corporate cut. That benefit, which allowed companies to immediately deduct investment spending from their income taxes, will be renewed as part of a bipartisan tax bill that passed the House in January.
It also challenges the narratives about the bill on both sides of the aisle. Democrats argued that the tax cuts only rewarded shareholders and did not help the economy. Republicans have characterized them as a no-cost gift to the middle class. Both seem to have been wrong.
“The evidence that taxes matter for investment is really there,” Gabriel Chodorow-Reich, a Harvard economist and one of the paper’s authors, said in an interview. “And the evidence that corporate tax cuts are expensive is also there. Both are simply characteristics of the data.”
Republicans approved the tax package in late 2017 on a party-line vote. The law included income tax cuts and other benefits for individuals. But he focused on cuts for companies, including lowering the corporate tax rate to 21 percent from a top rate of 35 percent.
For a limited time, it allowed companies to immediately deduct new investments from their income taxes, instead of deducting them over a period of several years. And it changed the way multinational companies are taxed, effectively reducing the rate many companies paid on income earned abroad.
Republicans said these incentives would spur increased investment and economic growth in the United States, which would boost workers’ wages.
Measuring the truth of these claims was difficult. In the years after the law was passed, investment increased, but at about the same rate as in the years before it was passed. This trend could be misleading. Investment growth could have slowed if the law had not existed. So the authors of the new paper – Mr Chodorow-Reich, Treasury’s Matthew Smith, Princeton’s Owen Zidar and Chicago’s Erik Zwick – created a more precise study.
The researchers pulled anonymized data from 12,000 corporate tax returns before and after the law’s passage, along with a new model of global investment behavior, to assess how the law’s corporate provisions affected businesses. They found that companies that benefited from the law increased investment significantly more than those that did not.
Both the reduction in the corporate tax rate and the ability to immediately write off all domestic investment encouraged more investment. However, the researchers found that direct spending was a much more effective incentive and had a lower cost to taxpayers. This is because it rewarded companies for new investment rather than reducing their taxes on profits made on long-ago investments.
“It has more bang for the buck,” Mr. Zwick said.
The researchers also found that lowering taxes on foreign-earned income boosted MNCs’ investment abroad as well as in the United States. They said this could be because spending by companies in other countries, such as improving supply chains, could create new efficiencies or free up more money to spend at home.
The total additional investment helped increase the size of the economy by about 0.1 percentage points per year, which translates into a long-term increase in average wages of about $750, the researchers concluded. Both are well below the Trump administration’s projections.
The study also contradicts conservatives’ claims that the increased growth from the law would fully offset the federal revenue lost from lower corporate tax burdens, causing additional individual income and corporate profits to be subject to federal taxes. It suggests that over the course of a decade, the law will have reduced corporate tax revenue by 40%. In the long run, the reduction is slightly less: about a third.
Economists did not break down the individual tax cuts, including a large cut for owners of certain businesses, such as law firms, who pay individual income taxes on their share of business profits. These cuts lowered taxes for a wide range of American workers, but even conservative supporters of the law rarely claimed they would boost investment.
Republicans set many of the individual cuts to expire at the end of next year in order to contain the fiscal costs of the 2017 law. Whether they are renewed, in whole or in part, will be an immediate challenge for either President Biden if he wins the his re-election in November, or for Mr. Trump if he succeeds in returning to the White House.
Congress is already grappling with whether to renew the direct spending provision, which began to be phased out last year. A bipartisan bill to extend it by two years, along with a temporary increase in the generosity of a tax credit for parents, passed the House earlier this year but has stalled in the Senate.
Mr. Zidar said in an interview that the new study suggests a possible compromise for lawmakers who want to more effectively stimulate investment without further swelling the budget deficit: expand the spending forecast, but pay for it by raising the corporate rate.
