New Study Finds TCJA Strongly Boosted Corporate Investment

The 2017 Tax Cuts and Jobs Act (TCJA)The Tax Cuts and Jobs Act in 2017 overhauled the federal tax code by reforming individual and business taxes. It was pro-growth reform, significantly lowering marginal tax rates and cost of capital. We estimated it reduced federal revenue by .47 trillion over 10 years before accounting for economic growth.
was the largest corporate taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.
reform in a generation, lowering the corporate tax rate from 35 percent to 21 percent, temporarily allowing full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs.
for short-lived assets (referred to as bonus depreciationBonus depreciation allows firms to deduct a larger portion of certain “short-lived” investments in new or improved technology, equipment, or buildings, in the first year. Allowing businesses to write off more investments partially alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs.
), and overhauling the international tax code. A new detailed and thorough study from economists associated with the National Bureau of Economic Research and the Treasury Department finds the reforms substantially raised U.S. capital investment and boosted economic growth. Simply put, as noted by economist Jason Furman, taxes actually do matter.

The study is based on a large sample of 12,000 corporate tax returns covering several years prior to the enactment of the TCJA and two years after. The authors find that, on average, firms impacted by the policy changes increased domestic investment by about 20 percent in the subsequent two years relative to firms with no tax change.

The TCJA contained several changes that impacted corporations in various ways depending on their circumstances and utilization of various tax provisions both before and after enactment. In addition to tax cuts—including the reduced corporate tax rate, bonus depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment.
, and repeal of the corporate alternative minimum tax—the TCJA included various tax increases on corporations, such as the elimination of the domestic production activities deduction and new limits on deductions for interest expense and net operating losses. The study estimates how the reforms on net altered company-specific tax liabilities, marginal effective tax rates, and the cost of capital.

The researchers modeled the long-run effects of the TCJA’s corporate reforms based on the short-run response of corporate taxpayers in the two years following enactment. They excluded the TCJA’s individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S.
provisions and assumed a fixed labor supply across the corporate and pass-through businessA pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates.
sectors.

Their ultimate result is an estimate that the U.S. domestic corporate capital stock will grow 7.4 percent over the long run as a result of the law. Most of the growth in investment and the capital stock is predicted to occur within 10 years, and nearly all of it in 15 years. As the capital stock grows, so do worker productivity and wages. The study estimates a 0.9 percent increase in real wages over the long run.

About half of the boost in investment and the capital stock is from a reduction in marginal effective tax rates, mainly due to lowering the statutory corporate tax rate. Nearly a quarter of the effect is from bonus depreciation, which boosts the capital stock by 2 percent, assuming firms expect the policy to be extended permanently. If instead businesses expect bonus depreciation to phase out as under current law (reducing bonus depreciation to 80 percent this year and eliminating it completely after 2026), the study predicts the TCJA’s corporate provisions cause an initial surge in investment and capital stock growth that peaks at about 6 percent in year 7 (i.e., around now or next year) followed by a decline in investment, resulting in a long-run capital stock that is about 4 percent higher relative to pre-TCJA law.

Additionally, the study finds the TCJA’s international provisions that apply to U.S. multinationals—including the global intangible low-taxed income (GILTI) regime and other aspects designed to encourage the domestic reporting of foreign intangible capital (intellectual property)—led companies to increase their foreign capital by about 10 to 14 percent in the two years following the reforms. The study finds evidence of complementarity between foreign and domestic operations, meaning companies that increase investment abroad tend to also increase investment domestically, leading to a boost in domestic capital of about 1.5 percent over the long run.

The modeling of taxes that apply to foreign income is simplified in several ways and limited by data constraints, calling into question whether the TCJA greatly increased investment abroad. In particular, the study estimates that the GILTI regime’s carveout for foreign tangible capital (the QBAI exemption) creates a strong incentive to invest abroad. However, our own modeling suggests this effect is likely small. Further, another recent paper that more fully accounts for pre-TCJA law, including deferral of foreign profits, finds that under the TCJA, foreign investment actually declined by 15.6 percent on average relative to the pre-TCJA regime.

Regarding the TCJA’s impact on tax revenue, the study finds small dynamic effects within the 10-year budget window after accounting for increased economic activity. Tax revenues from labor increase due to the increased wage growth but are offset by a decline in corporate tax revenue particularly from bonus depreciation in the first few years after enactment. However, by year 10, dynamic corporate tax revenue gains begin to offset static corporate tax revenue losses while dynamic labor tax revenue reaches about 15 percent of baseline corporate tax revenue. This is sufficient to fully offset the static revenue losses from the corporate provisions by the end of the budget window.

In some respects, the study may understate the impacts of the TCJA’s corporate tax reforms on domestic investment. Although the study design controls for the manufacturing sector’s exposure to the Trump administration’s tariff increases that began in 2018 and subsequent foreign retaliation measures, there may be additional effects in other industries worth considering. Additionally, the study does not appear to control for monetary policy, namely the interest rate hikes that occurred in 2018 and 2019, which would lower domestic investment.

Working in the other direction, the study does not account for TCJA’s requirement to begin amortizing R&D expenses beginning in 2022, a policy that will suppress R&D investment as long as it remains in place.

Broadly, however, the study’s results are largely consistent with our modeling of the TCJA, particularly regarding the impacts on domestic investment and tax revenue. Around the time of enactment and in subsequent analysis, we estimated the law’s corporate, individual, and estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs.
provisions would cause investment to surge in the initial years, growing the domestic private capital stock by 6.4 percent by 2025 and boosting wages by 1.7 percent and GDP by 3 percent, after which the phaseout of bonus depreciation and other tax cuts would cause a decline in investment, resulting in a long-run increase in the capital stock of 4.8 percent, wages of 1.5 percent, and GDP of 1.7 percent. We predicted large tax revenue losses that would shrink over time and become revenue gains by 2023. Regarding bonus depreciation, similar to this study, we find that tax revenue losses are front-loaded and decline substantially outside of the budget window.

The study’s estimated impacts on domestic investment are also largely consistent with a long history of empirical research, indicating corporate tax rate reductions and expensing boost domestic investment, wages, and economic growth.

This study confirms that the TCJA’s corporate tax reforms substantially boosted domestic investment, primarily due to the permanent reduction in the corporate tax rate and temporary full expensing for short-life investment. The study bolsters the case for making full expensing permanent and expanding it to other assets and warns against the Biden administration’s proposal to raise the corporate tax rate from 21 percent to 28 percent.

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