The Congressional Budget Office’s May 2022 forecast shows that the government now expects to bring in more tax revenue in the decade following the 2017 “Trump tax cuts” than it had projected prior to the December 2017 passage of tax reform.
Adjusting the forecasts to actual 2022 dollars, prior to the tax cuts the government projected $40.7 trillion of income tax, corporate tax, and payroll tax revenues between 2018 and 2027. The latest budget forecasts project $41.3 trillion of revenues for that period. Instead of reducing revenues by $1.5 trillion, the latest forecasts suggest tax revenues will come in $570 billion higher than expected.
The government now expects to bring in $3.8 trillion in corporate tax revenues between 2018 and 2027, almost identical to the $3.9 trillion forecasted prior to the tax cuts. Moreover, since taxes don’t exist in a vacuum—and the corporate tax reform propelled higher income growth and therefore higher income taxes and payroll taxes—the corporate tax reform likely paid for itself.
According to economists Tyler Goodspeed and Kevin Hassett, after the 2017 tax cuts, business investment soared 9.4% compared to the pre-tax cuts trend. For corporations, real investment rose 14.2%. Similarly, a 2021 Heritage Foundation report showed the dramatic growth in investment and wages that occurred after the tax cuts. A key driver in the surge in investment was multinational firms who chose to reinvest in U.S. markets instead of offshoring.
Did it work? In a new paper with my Tax Policy Center colleague Claire Haldeman, we conclude that, consistent with these goals, TCJA reduced marginal effective tax rates (METRs) on new investment and reduced the differences in METRs across asset types, financing methods, and organizational forms.
But it had little impact on business investment through 2019 (at which we stopped the analysis, to avoid confounding TCJA effects with those of the COVID-related shutdowns that ensued). Investment growth increased after 2017, but several factors suggest that this was not a reaction to the TCJA’s changes in effective tax rates.
First, the timing of the investment response was not consistent with a supply-side response. Much of the investment increase was concentrated in oil and related industries and appeared to be a response to increases in oil prices, not lower tax rates. Indeed, other investment did not grow very much, and even overall investment growth petered out by the end of 2019.
Investment growth across asset types such as equipment, structures, and intellectual property did not correlate with the law’s changes in METRs. The types of capital that saw the biggest cuts in tax rates also saw the smallest increases in investment.
In addition, the growth rate of business formation did not rise post-TCJA, and surveys suggest that only a small minority of businesses made TCJA-induced investments. Growth of employment and median wages slowed in 2018 and 2019 relative to the pre-TCJA years of 2016 and 2017. The much-vaunted bonuses that some firms provided employees at the end of 2017 were tiny relative to wages. And they appear to have been motivated mainly by political considerations or by the opportunity for firms to accelerate pay into 2017, when costs could be deducted against a 35 percent corporate tax rate, rather than 2018, when the deduction was worth only 21 cents on the dollar.
