In 2017, the Republicans passed the Tax Cuts and Jobs Act (TCJA), the largest tax reform passed since the Tax Reform Act of 1986. One of the major components of TCJA was cutting the statutory tax rate from 35 percent to 21 percent. When I analyzed the TCJA in 2017, I predicted that the corporate tax cut would be one of the redeeming features of the TCJA because it would boost global competitiveness. It looks like I was correct that it would improve the U.S. economy.
A couple of weeks ago, the National Bureau of Economic Research (NBER) released a paper entitled Tax Policy and Investment in a Global Economy (Chodorow-Reich et al., 2023). In addition to looking at the corporate tax rate cut, the authors also looked at the bonus depreciation provision and the various components of the international tax code overhaul. I want to look at the corporate tax reduction because about half the boost in investment and capital stock from the TCJA was due to the corporate tax reduction (p. 43).
As for the aggregate of all the provisions, the U.S. domestic corporate capital stock is to grow 7.4 percent over the long-term (i.e., ten years), as well as a 0.9 percent increase in domestic wages (p. 4). Plus, the abstract points out that "the TCJA caused domestic investment of firms with the mean tax change to increase roughly 20% relative to firms experiencing no tax change."
These findings do not surprise me because they are in line with what empirical research has to say on the effects of high corporate taxes. I have written before how corporate tax cuts spur investment. Conversely, I have written how high corporate tax rates cause countries to flee to other countries with friendlier tax codes, as well as how corporate taxes reduce labor productivity, slow economic growth, and creates double taxation effects. This recent NBER study shows how we need to keep corporate tax rates low instead of Biden's recommendation of raising corporate tax rates.
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