(Bloomberg Opinion) – of Donald Trump Tax Cuts and Jobs Act of 2017 it was the largest corporate tax cut in US history. How did it affect the economy? The question has taken on added importance now that the former president said thatif he beats President Joe Biden, he would like to cut corporate taxes even further.
Some background: Most economists have long favored cutting the corporate tax. At the previous rate of 35%—the law lowered it to 21%—the US rate was one of the highest in the world. Under former President Barack Obama, there was one PLAN to bring it down to 28%, along with closing some loopholes. academician literature showed that lowering the corporate tax would bring economic benefits, mainly by stimulating investment and economic growth.
Various postmortems were performed CONDUCTED on Trump's tax cuts over the past few years, but many did not have enough data on investments, or enough consideration of how the tax cuts did not benefit all companies equally. Now there are new data and ANALYSIS, the most comprehensive yet. The results are decidedly mixed, but it's clear that Trump's tax cuts were effective by some margin.
One result: Total tangible corporate investment increased by about 11%. This has been a welcome blow to an economy that, by some measures, was suffering from disinvestment DROUGHT. The strong state of the Biden economy may be due in part to Trump's tax cuts.
The second effect of the tax cut is even more dramatic. The federal government's corporate tax revenue fell by about 40%, due to lower tax rates and more generous spending provisions. This decline is from a corporate tax revenue base of 2.9% of GDP in 2017.
All of this means that US corporations got to keep more of their money and the US government got less. Suffice it to say, it has a wide STRING e opinions regarding this exchange. No study of the tax cut itself can resolve these disputes. However, it is central to any policy evaluation.
The government's fiscal position today is weaker than it was in 2017, so opinions on reallocating that resource to the private sector may have changed. On the bright side, there was long-term GDP growth of 0.9% – a significant amount in an economy of more than $27 trillion. When it comes to wages, however, the tax cuts have been a disappointment, as labor incomes increased by less than $1,000 per employee, far less than the bill's proponents predicted.
On the third hand – I am, after all, an economist — It's also the case that the benefits of the tax cuts could take up to a decade to show up. It is possible that the pandemic and the high rate of inflation interrupted the natural response to improved corporate incentives. If true, there could be even more of a bonus from these tax cuts in the years to come.
Some conclusions about the reduction of taxes have been more concrete. For example, the accelerated depreciation provisions generated more investment per dollar of tax revenue than any other stimulus in the bill. In contrast, the tax cut for pass-through firms did not perform well. This could be useful knowledge the next time the government restructures the corporate tax system.
The data also show that foreign firms investing in the US are a complement to domestic investment. This suggests that if the US provides more favorable tax and regulatory treatment to foreign inflows, domestic investment will also increase.
Ultimately, the final verdict on these tax cuts may depend on whether America can afford them. Currently the federal deficit is at STRING of 6% of GDP. Americans have proven themselves quite resistant to spending cuts or tax increases, so it's not clear how the budget can move to a more sustainable long-term position. The desirability of any tax cuts or spending increases may depend on what happens to the rest of the budget.
And that, in turn, depends on what happens in the November elections. The cut in the corporate tax rate was permanent, but the spending provisions began to be phased out last year, and some of the other provisions will also be phased out.
A re-elected Trump would try to protect one of his signature initiatives. A re-elected Biden would allow it expires. It remains an open question how hard each would fight to fulfill their promise.
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Tyler Cowen at (email protected)