A new economic study shows that the 2017 tax cuts strongly boosted corporate investment, wages, and growth. The detailed study, prepared by economists associated with the National Bureau of Economic Research and the Treasury Department, found that the corporate tax reforms substantially raised US capital investment and increased economic growth.
The study examined 12,000 corporate tax returns in the years prior to the enactment of the 2017 bill and the years after to determine the impact of the corporate rate reduction from 35 to 21%, bonus depreciation, and other changes.
The authors found that the corporate tax changes increased domestic investment by 20% in the two years after the bill was enacted, with most of the boost in capital investment coming from the lower corporate tax rate and bonus depreciation.
The study estimates that the corporate tax changes will increase the U.S. domestic corporate capital stock by 7.4% over the long run. The increased capital stock leads to increased worker productivity, resulting in increased real wages over the long run.
The study also found that after an initial decline in corporate tax revenue in the first few years, dynamic corporate tax revenues gains will fully offset the static revenue losses from the corporate provisions by the end of the 10-year budget window.
This study is consistent with a large body of economic research that shows that corporate tax rate reductions boost domestic investment, wages, and growth, and that corporate tax rate increases are the most economically damaging tax increases.
The study is also consistent with the projections of the Tax Foundation on the impact of the 2017 law. The Tax Foundation predicted that domestic investment would surge, with the capital stock increasing by 6.4% by 2025, boosting wages by 1.7% and GDP by 3%.
Former Obama economic adviser Jason Furman has said that this new NBER study shows that “taxes actually do matter,” and that “these are the most convincing estimates of the response of investment to corporate tax changes that I have ever seen.”
This study confirms that the 2017 corporate tax reforms, more specifically the corporate rate reduction, worked to substantially increase business investment, wages, and growth.
The study also refutes once and for all the notion that a higher corporate tax rate would provide any economic benefits at all. The case should be clear that raising the corporate rate would be a major economic mistake.