Trump’s tax cut boosted investment, but didn’t pay for itself, study finds


The corporate tax cuts that President Donald J. Trump signed into law in 2017 have boosted investment in the U.S. economy and generated modest wage increases for workers, according to the most rigorous and detailed study yet of the law’s effects. .

However, those benefits are smaller than Republicans promised and have come at a high cost to the federal budget. The corporation tax cuts failed to pay for themselves, as the Conservatives insisted they would. Instead, they are adding more than $100 billion a year to America’s ballooning $34 trillion national debt, according to the quartet of researchers from Princeton University, the University of Chicago, Harvard University and the Treasury Department.

Researchers found that the cuts generated wage increases that were “an order of magnitude below” what Trump officials predicted: about $750 per worker per year on long-term average, compared with promises of $4,000 to $9,000. per worker.

The study is the first to use a large amount of data from corporate tax returns to draw conclusions about the Tax Cuts and Jobs Act, which was passed solely with Republican support. Their findings could help shape the debate over 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 profitable corporate cut. That benefit, which allowed companies to immediately deduct investment spending from their income taxes, would be renewed as part of a bipartisan tax bill that passed the House in January.

It also challenges narratives about the bill on both sides of the aisle. Democrats have claimed that the tax cuts only rewarded shareholders and did not help the economy. Republicans have called them a free boon for the middle class. They both seem to have made a mistake.

“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 costly is also there. “Both are simply features of the data.”

Republicans passed the tax package in late 2017 on a party-line vote. The law included cuts in income tax rates and other benefits for individuals. But he focused on cuts for corporations, including a reduction in the corporate income 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, rather than deducting them over a period of several years. And it changed the way multinational companies were taxed, effectively reducing the rate many companies paid on income earned abroad.

Republicans said such incentives would trigger greater investment and economic growth in the United States, boosting workers’ take-home pay.

Measuring the truth of those claims has been difficult. In the years after the law was passed, investment grew, but at about the same rate as in the years before it was passed. That trend could be misleading; Investment growth could have slowed if not for the law. So the authors of the new paper (Chodorow-Reich, Treasury’s Matthew Smith, Princeton’s Owen Zidar, and Chicago’s Erik Zwick) constructed a more accurate study.

The researchers relied on 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 estimate how the law’s corporate provisions influenced companies. They found that corporations 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 cancel all domestic investments stimulated greater investment. But the researchers found that immediate spending was a much more efficient incentive and came at a lower cost to taxpayers. This is because it rewarded companies for making new investments rather than reducing their taxes on profits made from investments made long ago.

“It has a higher profitability,” Zwick said.

The researchers also found that reducing taxes on income earned abroad boosted investments by multinational companies both abroad and in the United States. They said that 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 a year, translating into a long-term increase in average wages of about $750, the researchers conclude. Both are well below the Trump administration’s forecasts.

The study also contradicts conservative claims that higher growth from the law would fully offset federal revenue lost from reduced corporate tax burdens by stimulating additional individual income and corporate profits that would be subject to federal taxes. It suggests that over the course of a decade, the law will have reduced corporate tax revenue by 40 percent. In the long term, the reduction is slightly smaller: about a third.

The economists did not analyze 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. Those cuts reduced taxes for a wide range of American workers, but even the law’s conservative defenders rarely claimed they would increase investment.

Republicans set many of the individual cuts to expire at the end of next year, in order to keep the budget cost of the 2017 law down. Renewing them, in whole or in part, will be an immediate challenge for President Biden, if he wins re-election. in November, or for Trump, if he manages to return to the White House.

Congress is already debating whether to renew the immediate spending provision, which began phasing out last year. A bipartisan bill to extend it for 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.

Zidar said in an interview that the new study suggests a possible compromise for policymakers seeking to stimulate investment more efficiently without further inflaming the budget deficit: extend the spending provision, but pay for it by raising the corporate rate.

You may also like...