More Evidence for Trump’s Corporate Tax Reform, Parts One and Two

November 2, 2023 by Dan Mitchell Part I @ International Liberty 

I’m very critical of bad policies we got during the Trump years, most notably profligacy and protectionism.

But I shower praise on the good policies, such as the 2017 tax legislation (especially the lower corporate tax rate and the curtailing of the state and local tax deduction).

Today, we’re going to focus on the positive.

I’ve already written several columns about the benefits of Trump’s corporate tax reforms.

There’s now even more evidence to share, thanks to new academic research by Gabriel Chodorow-Reich from Harvard, Matthew Smith from the Treasury Department, Owen Zidar from Princeton, and Eric Zwick from the University of Chicago.

Here’s the most important finding.

The authors have a jargon filled explanation of their results.

This paper combines administrative tax data and a model of global investment behavior to evaluate the investment and firm valuation effects of the Tax Cuts and Jobs Act (TCJA) of 2017, the largest corporate tax reduction in the history of the United States. …the TCJA caused domestic investment of firms with the mean tax change to increase by roughly 20% relative to firms experiencing no tax change. …Figure 4 shows means of investment growth for different quantiles of the composite domestic tax term Γˆ−τˆ (“binned” scatter plots). For domestic-only firms plotted in Panel A, this composite tax term exactly comports with economic theory. The tight upward slope reveals a positive investment elasticity to taxation around TCJA. For multinational firms plotted in Panel B, our theory no longer dictates a single elasticity to Γˆ and τˆ. Nonetheless, the upward slope indicates a positive investment elasticity in this sample.

When citing academic research, I usually try to translate the jargon so that normal people can understand the findings.

Fortunately, I don’t have to do that because William McBride and Alex Durante of the Tax Foundation already stepped up to the plate. Here is their simplified explanation of the research.

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. …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. …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.

None of this should come as a surprise to people who read this primer or watched this video.

Sadly, Biden wants to reverse this progress because of class-warfare ideology.

Part II @ International Liberty

Yesterday’s column reviewed a new academic study which found that Trump’s corporate tax reforms had a very positive impact on investment, which means more growth and higher wages for the American economy.

The study, which was written by Gabriel Chodorow-Reich from Harvard, Matthew Smith from the Treasury Department, Owen Zidar from Princeton, and Eric Zwick from the University of Chicago, echoes other findings on the benefits of better corporate tax policy.

Today, let’s investigate what the study says about the impact of Trump’s corporate tax reforms on tax revenue.

Here’s a chart from the study that looks at the revenue impact over a 20-year period.

And here’s the accompanying analysis from the study.

The total effect of the TCJA’s corporate provisions on tax revenue combines two forces: (i) the static revenue effect of the tax changes holding the capital stock fixed, and (ii) the revenue consequences of the dynamic changes in capital induced by the law. …). The solid red line in figure 9 shows the total change in corporate taxes as a result of the dynamic changes in capital, expressed as a ratio of pre-TCJA corporate tax revenue. …The dynamic response of capital reduces corporate tax revenue on impact and has a small positive long-run effect. The impact reduction occurs because capital does not jump at the time of the law change, but the immediate increase in investment incurs adjustment costs that depress taxable income and also increases depreciation deductions. Over time, rising domestic and foreign capital increase domestic corporate income. …However, because the negative revenue impact of higher depreciation deductions persists, total dynamic corporate revenue effects remain negative until year 12 and never exceed 5% of pre-TCJA revenue. …The solid blue line in figure 9 shows the effect of changes in labor taxes… Since the wage depends on the capital stock, it does not jump at the time of the law change but instead rises over time. By year 10, the increase in wages generates additional labor tax revenue of almost 15% of the pre-TCJA corporate tax revenue. Any overall long-run increase in tax revenue due to changes in capital therefore largely arises from higher labor rather than corporate tax payments

If you want a simpler explanation, here’s how the Tax Foundation summarizes the study’s findings regarding the revenue impact of Trump’s corporate tax reforms.

 

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.

Very similar to what I wrote in 2021 and 2022.

In other words, this new research is more evidence in favor of the Laffer Curve.