Our research provides a framework for assessing the corporate taxation provisions of the TCJA and draws five lessons: 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 TCJA 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.
Legislators reduced the projected budgetary cost of the TCJA by setting many of its provisions to expire. While the cut in the corporate tax rate from 35 percent to 21 percent is permanent, accelerated depreciation started phasing down in 2023 by 20 percentage points each year. Beginning in 2026, the 20 percent deduction for qualified pass-through business income—business income reported on the owner’s individual income tax returns—will expire. Expenses for research and development started receiving less favorable tax treatment in 2022. Now these expenses must be amortized over five years rather than immediately deducted.
The overall fiscal picture of the US government looks worse than it did during the 2017 tax debate. Extending all or most of the provisions in the TCJA and letting the rate cut remain will be costly relative to the positive effects on economic growth. In addition, the law was passed during a period of exceptionally low interest rates, and this has since changed. Interest rates affect tax policy in several ways. Tax cuts financed by increasing deficits crowd out private investment by raising interest rates, an effect that is even stronger when interest rates are already high. Furthermore, with higher inflation and nominal interest rates, accelerated depreciation without limitations on interest deductions can sacrifice more tax revenue than it encourages in investment. Conversely, the switch to amortization of research and development expenses is more costly to firms facing higher interest rates.
One takeaway from the TCJA is that some of its expired and expiring provisions, such as accelerated depreciation, generate more investment per dollar of forgone tax revenue than do other provisions. We conjecture that research and development provisions would generate similar investment, though a more confident conclusion requires further investigation. By contrast, the tax cuts to pass-through income look quite unattractive: They encourage relatively low amounts of new investment, incentivize recharacterizing labor income as business income to avoid employment taxes, and deliver the most gains to those with the highest incomes.
The expiring provisions of the TCJA will create pressure to revisit these topics, and avoiding the path of least political resistance—that is, simply renewing all the provisions—will be a challenge. Large corporations and smaller pass-through firms are powerful constituencies. The previous major business tax reform was the Tax Reform Act of 1986, which benefited from unique historical features. In that case, both parties cooperated under an extremely popular second-term president to increase corporate taxes as part of a package that reduced individual taxes.
