One Economic Study's Take On The 2017 Tax Bill's Impact

Economic studies of the macroeconomic impact of tax cuts are more art than science and shouldn't be considered solidly reliable. But that doesn't mean that they should be ignored either.

Lower tax rates on business income does not have a significant dynamic effect on the economy. They just take money away from the government and give it, ultimately, to the owners of those businesses.

Changing incentives to better incentives can have a big impact (although incentives that change the timing of deductions for corporate expenditures for capital investments may only change the timing of corporate expenditures for capital investments, particularly if they are set to expire at a certain time).

We assess the business provisions of the 2017 Tax Cuts and Jobs Act, the biggest corporate tax cut in US history. We draw five lessons. 

First, corporate tax revenue fell by 40 percent due to the lower rate and more generous expensing. 

Second, firms with larger declines in their effective tax wedge increased investment relatively more. In aggregate, we suggest a loose consensus from the literature that total tangible corporate investment increased by 11 percent. 

Third, the business tax provisions increased economic growth and wages by less than advertised by the Act’s proponents, with long-run GDP higher by less than 1% and labor income by less than $1,000 per employee. 

Fourth, provisions that increase foreign investment by US-based multinationals also boost their domestic operations. 

Fifth, some of the expired and expiring provisions, such as accelerated depreciation, generate more investment per dollar of tax revenue than others.

Gabriel Chodorow-Reich, Owen M. Zidar & Eric Zwick, "Lessons from the Biggest Business Tax Cut in US History",  NBER Working Paper 32672 (July 2024).

As noted here, in contrast, the tax cuts to pass-through firms underperformed. The lost corporate tax revenue was a decline from a baseline of corporate tax revenue of 2.9% of GDP in 2017 (i.e. they reduced federal tax collections by 1.16% of GDP per year, so far, for six years with more to come). There has been a long-run increase in GDP of 0.9% — which is a substantial sum in an economy of more than $27 trillion. But who really knows how it would have changed in the absence of the 2017 tax bill to any meaningful level of precision.