Trump’s Tax Cut Fueled Investment but Did Not 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 delivered a modest pay bump for workers, according to the most rigorous and detailed study yet of the law’s effects.

Those benefits are less than Republicans promised, though, and they have come at a high cost to the federal budget. The corporate tax cuts came nowhere close to paying for themselves, as conservatives insisted they would. Instead, they are adding 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 the cuts delivered wage gains that were “an order of magnitude below” what Trump officials predicted: about $750 per worker per year on average over the long run, compared to promises of $4,000 to $9,000 per worker.

The study is the first to use vast data from corporate tax filings to draw conclusions about the Tax Cuts and Jobs Act, which passed with only Republican support. Its findings could help shape debate on renewing parts of the law that are set to expire or have begun to phase out.

That 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, 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 the tax cuts only rewarded shareholders and did not help the economy. Republicans have called them a cost-free boon to the middle class. Both appear to have been wrong.

“The evidence that taxes matter for investment really is 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 also is there. They’re both just features of the data.”

Republicans passed the tax package in late 2017 on a party-line vote. The law included income-tax rate cuts and other benefits for individuals. But it was centered 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, instead of 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 those incentives would trigger increased investment and economic growth in the United States, which would lift workers’ take-home pay.

Measuring the truth of those claims has been difficult. In the years after the law passed, investment grew, but at roughly the same rate as it had in the years before its passage. That trend could be deceptive; investment growth might have slowed if not for the law. So the authors of the new paper — Mr. Chodorow-Reich, Matthew Smith of Treasury, Owen Zidar of Princeton and Erik Zwick of Chicago — constructed a more exact study.

The researchers drew on anonymous data from 12,000 corporate tax returns from before and after the law passed, along with a new model of global investment behavior, to estimate how the law’s corporate provisions influenced businesses. They found 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 write off all domestic investments spurred more investment. But the researchers found the immediate expensing was a far more efficient incentive and came at a lower cost to taxpayers. That’s because it rewarded firms for making new investments instead of reducing their taxes on profits earned from investments made long ago.

“It has a bigger bang for the buck,” Mr. Zwick said.

The researchers also found that reducing taxes on income earned abroad boosted multinational firms’ investments overseas as well as in the United States. They said that could be because companies’ spending in other countries, like to improve supply chains, could create new efficiencies or free up more money to spend at home.

Total additional investment helped to increase the size of the economy by about 0.1 percentage points a year, which translates to a long-run increase in average wages of about $750, the researchers conclude. Both are well below Trump administration forecasts.

The study also contradicts conservatives’ claims that increased growth from the law would fully offset federal revenue lost from lower corporate tax burdens, by spurring 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 revenues by 40 percent. In the long run, the reduction is slightly smaller: about one-third.

The economists did not analyze the individual tax cuts, including a large cut for owners of certain businesses, like law firms, who pay individual income taxes on their share of the business profits. Those cuts reduced taxes for a wide range of American workers, but even conservative proponents of the law rarely claimed they would increase investment.

Republicans set many of the individual cuts to expire at the end of next year, in order to hold down the budgetary cost of the 2017 law. Whether to renew them, all or in part, will be an immediate challenge for either President Biden, if he wins re-election in November, or Mr. Trump, if he is successful in returning to the White House.

Congress is already wrestling with whether to renew the immediate expensing provision, which began to phase out last year. A bipartisan bill to extend it by two years, coupled 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 looking to most efficiently spur investment without further inflaming the budget deficit: extend the expensing provision, but pay for it by raising the corporate rate.

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