The Tax Cut and Jobs Act of 2017

Jeffrey Miron

Focusing on the business tax cuts, a new paper reaches five conclusions:

First, large corporate tax cuts are expensive and increase the deficit substantially; specifically, the reform reduced corporate tax revenue by 40 percent.

Second, taxes matter for corporate investment. Firms facing larger corporate tax cuts invested more than firms facing smaller cuts. Three empirical approaches indicate that the tax cuts increased total tangible corporate investment by 8–14 percent. This response was far too small to offset the forgone tax revenue.

Third, domestic tax treatment of profits abroad can have important effects on investment at home; for example, provisions that increase foreign investment by US-based multinationals also boost their domestic operations.

Fourth, the effects of the [Tax Cut and Jobs Act] on economic growth and wages were smaller than advertised. Our analysis shows a long-run increase in wages of $750 per year (in 2017 dollars) per full-time equivalent employee. This impact was significantly below the $4,000–$9,000 range that the Council of Economic Advisers predicted before the law’s passage.

Fifth, the economic value received from forgoing tax revenue varies across different tax provisions. For example, it matters whether corporate tax reform encourages new capital creation via investment incentives rather than enriching old capital with corporate income tax cuts.

In brief, the corporate income tax changes generated substantial benefits, but several claims about these benefits (only a minimal reduction in revenue, with a large increase in wages) were significant exaggerations.

This article appeared on Substack on August 29, 2024.