How Is the Tax Cuts and Jobs Act Faring at Five Years?

Coming into the calendar year of 2023, one would think that tax reform would be furthest from my mind. There is the rampant inflation, the rising crime, a health care system that is in shambles from the pandemic and lockdowns. Yet that is what is on my mind at the moment. This week is the five-year anniversary that the Tax Cuts and Jobs Act (TCJA) was enacted. Not only was the TCJA the most noteworthy piece of legislation that the Republicans passed when they last controlled Congress, but the TCJA was also the most significant tax reform the United States has seen since the Tax Reform Act of 1986. 

I took a look at the TCJA five years ago shortly after it passed Congress. Approaching the one-year anniversary of the TCJA, I illustrated how the effects of the TCJA were a mixed bag. I also covered the state and local tax (SALT) deduction, which I thought was an improvement over the previous status quo of no limit on the deduction. I wanted to see what research was conducted in 2021 and 2022 to give a clearer picture on its effects at the five-year mark.

Corporate tax reform. One of the aspects that I liked most about the TCJA is with regards to the corporate tax. It lowered the statutory corporate tax rate from 35 percent to 21 percent. Prior to the TCJA, the United States had one of the highest corporate tax rates in the developed world. As I have pointed out, the corporate tax is one of the least efficient and most harmful taxes out there. To see the rate be lowered was a blessing unto itself. The Left-leaning Tax Policy Center looked at how corporate tax reform affected foreign direct investment [FDI]  (Matheson et al., 2022). This research had the following main findings showing how the TCJA encouraged foreign-owned companies to invest in the United States:

• On average, retained earnings rose about 0.5 percent in response to each percentage-point fall in the effective marginal tax rates.
• Investment in property, plant, and equipment [PPE] also rose following the TCJA tax cut, but less strongly. On average, about 0.35 percent for each percentage point decline in the EMTR....which was weekend when macroeconomic controls were introduced. 
• TJCA tax cuts thus appear to have spurred investment in tangible assets mainly through their stimulative effective on aggregate demand. 

The libertarian Cato Institute illustrated another benefit: increased corporate tax revenues. Why were revenues up more than government economists predicted? Because there was less tax evasion and higher economic activity in response. However, to be fair, the Tax Policy Center argues that it was the strong economy that fueled the corporate tax receipts. As a reminder, the Tax Policy Center did argue (see above) that corporate tax reform in the TCJA improved the economy. Furthermore, as the Right-leaning Tax Foundation points out, any temporary loss in federal tax revenue was more than compensated for by increased corporate investment. 

Individual income tax cuts. As the Congressional Budget Office shows with its data (also see the IRS' Statistics of Income data), the TCJA reduced the income tax rate for most taxpayers. How did this play out? The Federal Reserve Bank of Dallas found that an income tax cut equaling 1 percent of the GDP led to a 1.3 percentage point faster job growth and nearly 1.5 percentage points higher GDP growth (Kumar, 2022). The impacts were strongest felt in the first year of the TCJA and dropped in subsequent years. The author posited two reasons why the impacts were not as pronounced. One is that tax cuts are not as potent in an economic boom. The second is that 70 percent of those in the lowest quintile did not receive a tax cut since many in that quintile pay little to nothing in federal income tax. 

Charitable Giving. Some were hoping that maintaining a high deduction for charitable giving with a combination of the SALT deduction would have resulted in more charitable giving. A report from the Right-leaning American Enterprise Institute found that the TCJA reduced charitable giving (Husock, 2022). AEI's conclusion was that the government would need to create additional tax incentives for further charitable giving. The Right-leaning Heritage Foundation disagrees with AEI and found that there was increased charitable giving between 2017 and 2019.

Other business tax changes. The Right-leaning Tax Foundation released a November 2022 report on business tax changes from the TCJA that will start to phase out in 2023. The major provision for business taxes aside from corporate tax reform was a 100 percent bonus depreciation. This provision allowed for businesses to "deduct the full cost of most short-life business investments, such as equipment and machinery, substantially lower the cost of investing in the United States." The Tax Foundation subsequently estimated that keeping this depreciation permanent, along with canceling R&D amortization and retaining current law international tax rates, would increase long-term economic output by 0.6 percent.

Postscript. The University of North Carolina has some more research here, but I will end by saying I was hoping for some more research on the topic. After all, the TCJA had major impact on tax policy. At the same time, part of me is not surprised. Second, tax reform can require a decade or more before taking into full effect. The effects might be more minimal since many of the TCJA provisions are temporary. Third, it is likely that the effects of the TCJA are being masked or distorted by the pandemic and lockdowns. It does seem like the TCJA has done more good than harm. As I pointed out in early 2018, reducing taxes is not helpful if not accompanied by a significant decline in government spending. The problem is that the Biden administration has approved $4.8 trillion in new government borrowing. Until the government can get its spending under control, legislation such as the TCJA will not live to its full potential.