Trump’s tax cut stimulated investment, but did not pay for itself, research shows

The corporate tax cuts that President Donald J. Trump signed into law in 2017 have boosted investment in the U.S. economy and provided modest pay increases for workers, most said. rigorous and detailed study thout of the consequences of the law.

However, those benefits are less than Republicans promised, and they come at a high cost to the federal budget. The corporate tax cuts did not nearly pay for themselves, as conservatives insisted. Instead, they are adding more than $100 billion annually to the $34 trillion U.S. national debt, which is still growing. for the quartet of researchers from Princeton University, the University of Chicago, Harvard University and the Treasury Department.

The researchers found that the cuts produced wage gains “an order of magnitude lower than” what Trump officials predicted: an average of about $750 per worker per year over the long term, compared with promises of $4,000 to $9,000 per worker.

The study is the first to use vast amounts of data from corporate tax returns to draw conclusions about the Tax Cuts and Jobs Act, which passed only with Republican support. The findings of this research could help shape the debate on the renewal of parts of the law that are about to expire or be phased out.

That includes a key provision targeting investments, which the authors say is the most cost-effective business cut. That benefit, which allowed companies to immediately deduct capital expenditures from their income taxes, would be extended as part of a bipartisan tax bill passed by the House of Representatives in January.

It also challenges the narratives about the bill from both sides of the aisle. Democrats argue that the tax cuts only reward shareholders and do not benefit the economy. Republicans call them a free boon for the middle class. Both appear to have been wrong.

“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 expensive is also there. They are both just features of the data.”

Republicans passed the tax package on a party-line vote in late 2017. The law included income tax cuts and other benefits for individuals. But it revolved around cuts for companies, including a reduction in the corporate tax rate from 35 percent to 21 percent.

For a limited time, companies could 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 lowering the rate many companies paid on income earned abroad.

Republicans said these incentives would lead to more investment and economic growth in the United States, increasing workers’ take-home pay.

Measuring the truth of these claims has been difficult. In the years after the law was passed, investment grew, but at about the same pace as in the years before its enactment. That trend could be deceptive; Without the law, investment growth might have slowed. That’s why the authors of the new paper — Mr. Chodorow-Reich, Matthew Smith of the Treasury Department, Owen Zidar of Princeton and Erik Zwick of Chicago — set up a closer investigation.

The researchers relied on anonymous data from 12,000 corporate tax returns from before and after the law, along with a new model of global investment behavior, to estimate how the law’s corporate provisions affected companies. They found that companies that took advantage of the law increased their investments significantly more than those that did not.

Both the reduction in the corporate tax rate and the possibility of immediately writing off all domestic investments stimulated more investment. But the researchers found that the immediate spending was a much more efficient incentive and came at a lower cost to taxpayers. That’s because it rewarded companies for making new investments rather than lowering their taxes on profits from long-ago investments.

“It’s better value for money,” Mr Zwick said.

The researchers also found that lowering taxes on income earned abroad boosted multinational companies’ investments abroad and in the United States. They said this could be because companies’ spending in other countries, such as improving supply chains, could unlock new efficiencies or free up more money to spend domestically.

Total additional investment helped expand the size of the economy by about 0.1 percentage points per year, translating into a long-term increase in average wages of about $750, the researchers concluded. Both are well below the Trump administration’s forecasts.

The study also contradicts conservatives’ claims that increased growth through the law would fully offset federal revenues lost from lower corporate taxes, by boosting additional individual income and corporate profits that would be subject to federal taxes. It suggests that the law will have reduced corporate tax revenues by 40 percent over the course of a decade. 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, that pay individual income taxes on their share of corporate profits. Those cuts lowered taxes for a wide range of American workers, but even conservative supporters of the law rarely claimed they would increase investment.

Republicans have decided that many of the individual cuts will expire at the end of next year to contain the budget costs of the 2017 law. Whether to extend them in whole or in part will be an immediate challenge for President Biden, if he wins re-election in November, or for Mr Trump, if he manages to return to the White House.

Congress is already wrestling with whether to extend the immediate spending provision, which was phased out last year. A bipartisan bill to extend it for two years, coupled with a temporary increase in the generosity of a parent tax credit, passed the House earlier this year but stalled in the Senate.

Mr. Zidar said in an interview that the new study suggests a possible compromise for lawmakers who want to stimulate investment in the most efficient way without further widening the budget deficit: extend the spending provision, but pay for it by raising corporate interest rates.