Trump’s Tax Cut Fueled Investment but Did Not Pay for Itself, Study Finds

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Trump’s Tax Cut Fueled Investment but Did Not Pay for Itself, Study Finds


The corporate tax cuts that President Donald J. Trump signed into law in 2017 boosted investment in the U.S. economy and gave workers a modest pay increase, according to the most accurate and detailed study of the law’s impact to date.

However, these benefits are less than Republicans promised and come at a high cost to the federal budget. The corporate tax cuts were nowhere near paying for themselves, as the Conservatives had claimed. Instead, they are adding more than $100 billion a year to the $34 trillion U.S. national debt and continuing to rise, according to the quartet of researchers at Princeton University, the University of Chicago, Harvard University and the Treasury Department.

The researchers found that the cuts resulted in wage gains that were “an order of magnitude below” what Trump officials had predicted: an average of about $750 per worker per year in the long run, compared with promises of $4,000 to $9,000 -dollars per worker.

The study is the first to use extensive data from corporate tax returns to draw conclusions about the Tax Cuts and Jobs Act, which passed only with Republican support. Its findings could help shape the debate over renewing parts of the law that are or are due to expire.

This includes a key provision targeting investments, which the authors describe as the most cost-effective cut for companies. That benefit, which allows companies to immediately deduct capital expenditures from their income taxes, would be renewed under a bipartisan tax bill passed in the House of Representatives in January.

It also challenges the narrative about the bill on both sides of the aisle. Democrats claim the tax cuts only rewarded shareholders and didn’t help the economy. Republicans have described it as a freebie for the middle class. Both appear to have been wrong.

“There is actually evidence that taxes matter for investment,” Gabriel Chodorow-Reich, a Harvard economist and one of the paper’s authors, said in an interview. “And there is also evidence that corporate tax cuts are expensive. Both are just features of the data.”

Republicans passed the tax package in an internal party vote at the end of 2017. The law provided reductions in the income tax rate and other benefits for individuals. However, the focus was on cuts for businesses, including a reduction in the corporate tax rate from the previous 35 percent to 21 percent.

For a limited time, it allowed companies to immediately deduct new investments from income taxes instead of deducting them over a period of several years. And it changed the way multinational corporations were taxed, effectively reducing the tax rate many companies paid on income earned abroad.

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

It was difficult to assess the veracity of these claims. In the years following the law’s passage, investment increased, although at about the same pace as in the years before its passage. This trend could be deceptive; Without the law, investment growth may have slowed. So the authors of the new paper — Mr. Chodorow-Reich, Matthew Smith of the Treasury Department, Owen Zidar of Princeton and Erik Zwick of Chicago — produced a more detailed study.

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

Both the reduction in the corporate tax rate and the ability to immediately write off all domestic investments led to more investment. However, the researchers found that instant settlement provided a far more efficient incentive and came at a lower cost to taxpayers. Because it rewarded companies for new investments rather than reducing their taxes on profits from long-ago investments.

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

The researchers also found that reducing taxes on income earned abroad increased investment by multinational companies both abroad and in the United States. They said that could be because spending by companies in other countries, such as improving supply chains, could create new efficiencies or free up more money for spending at home.

The total additional investment helped increase the size of the economy by about 0.1 percentage points per year, equivalent to a long-term increase in average wages of about $750, the researchers conclude. Both are well below the Trump administration’s forecasts.

The study also contradicts conservatives’ claims that higher growth through the law would fully offset federal revenue losses from lower corporate tax burdens by spurring additional individual income and corporate profits that would be subject to federal tax. It suggests the law will reduce corporate tax revenues by 40 percent over 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, who pay individual income taxes on their share of corporate profits. These cuts lowered taxes for a wide range of American workers, but even conservative supporters of the law rarely claimed that they would increase investment.

Republicans are setting many of the individual cuts to expire at the end of next year to keep the budgetary costs of the 2017 law down. Whether to renew 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 grappling with the question of whether to renew the immediate reimbursement provision, which began expiring last year. A bipartisan bill to extend it by two years, coupled with a temporary increase in the generosity of a parental tax credit, passed the House earlier this year but failed in the Senate.

Mr. Zidar said in an interview that the new study suggests a possible compromise for lawmakers who want to most efficiently boost investment without further fueling the budget deficit: expand the expense rule but pay for it by increasing the corporate tax rate.



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2024-03-04 14:41:49

www.nytimes.com