The Tax Cuts and Jobs Act (TJCA), passed in 2017, was the largest corporate tax cut in U.S. history. Several years after its passage, policymakers and economists are still debating the law’s effect. Did the reductions in business taxes boost investment, wages, and U.S. competitiveness as its proponents promised? Or did the law merely increase the deficit while benefiting the rich?

In a new working paper, Gabriel Chodorow-Reich (Harvard), Matthew Smith (Treasury Department), Owen Zidar (Princeton), and Eric Zwick (Chicago Booth) argue that while the TJCA did boost domestic corporate investment, the law’s overall feedback effects on corporate tax revenue have been small because the gains from additional investment have been offset by the losses from more generous investment incentives.

Ultimately, the researchers show that the TCJA had substantial negative effects on corporate tax revenue. Modeling the dynamic effects (those effects that take into account the potential for economic growth as a result of the law) of the TCJA on corporate tax revenue, the researchers find that TCJA’s revenue effects in the first 10 years average less than 2% of pre-TCJA corporate tax revenue per year. That’s a roughly 41% decline in corporate tax collections over the ten-year period.

How the TCJA affected corporate investment and corporate tax revenue

In addition to many other changes, the TCJA reduced the top statutory tax rate on corporate income from 35 to 21 percent, gave companies larger deductions for depreciating new equipment and other tangible assets, and introduced a new regime for taxing foreign source income.

To study the effects of these changes in tax policy, the researchers built a new model of global investment behavior. Feeding their model with tax returns from mid-size and large C-corporation from the U.S. Treasury, the researchers produce several main findings:

• Through the reduction in the corporate rate and changes that allowed businesses to fully expense certain investments, the TCJA substantially boosted domestic corporate investment. In the researchers’ model, firms subjected to the average tax change increased investment by 20% relative to firms that experienced no change.
• The long-run effects of the TCJA on domestic capital are 7%. These effects could potentially boost corporate tax revenue through additional taxes on capital accumulation and labor.
• However, revenue gains from this boost in capital are offset by the law’s higher deductions for depreciation of certain investments. As a result, the total effect on tax revenue over ten years, including dynamic feedback from resulting economic growth, is a roughly 41% decline in corporate tax collections, which is close to the mechanical decline in corporate tax receipts from the largest corporate tax cut in U.S. history.
• Changes to international tax provisions also helped boost domestic investment. The TCJA transitioned the U.S. business tax regime from a global system (where U.S. companies only pay U.S. taxes when repatriating foreign income) to a territorial system (where the U.S. corporate rate only applies to domestic income) and introduced novel international tax provisions that incentivized U.S. multinationals to increase their foreign tangible capital through a minimum tax of 10.5% on Global Intangible Low-Taxed Income (GILTI). These changes did encourage U.S. multinationals to increase their foreign tangible capital. However, the researchers found that higher foreign capital accumulation from these provisions also stimulated domestic investment, indicating foreign and domestic capital are complements in the sense that boosting investment abroad raises the benefits to investing at home. For example, integrated production, or “global value chains” within multinational firms, could give rise to complementarity because more foreign capital increases the upstream supply of imported inputs or downstream demand for domestic output, both of which raise the marginal benefits of domestic capital.

Policy Implications 

To reduce the budgetary cost of the bill, the TCJA legislated many corporate provisions to expire. While the tax rate cut from 35% to 21% was made permanent, other key provisions are approaching expiration. For example, the law allows corporations to deduct (or expense) 100% of their investment for qualified property for the first five years, followed by a phase-out of expensing of 20 percentage points per year.

The researchers find that some of the expired and expiring provisions, such as accelerated depreciation, generate more investment per dollar of tax revenue than do other provisions in the bill.  This finding can help inform corporate tax reform discussions in 2025. 

The findings suggest that a revenue-neutral reform that paid for extending accelerated depreciation by raising statutory corporate tax rates would boost investment. Moreover, for those who want to increase investment incentives, the findings suggest that they will get more bang for the buck by extending accelerated depreciation than by lowering corporate tax rates further. And, for those who want to increase tax revenue, the findings suggest that they will get smaller declines in capital accumulation if they focus on rate increases than on reduced investment incentives like accelerated depreciation. 

To learn more about the research and its main findings, download the full paper.