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What effect did the 2017 Tax Cuts and Jobs Act have on U.S. businesses and families?

The content under the seven headings below consists of excerpts from the September 16, 2019 article by Economist Aparna Mathur appearing on the website of the American Enterprise Institute. The headings have been added to organize the information. Ms. Mathur’s article (linked below) discusses economists’ theories as to various causes underlying the below-listed 2018/2019 developments.

1. Background

  • Corporate tax reform was a centerpiece of the December 2017 Tax Cuts and Jobs Act (TCJA). For decades, while other countries cut rates, the US did not change its corporate tax rate, resulting in the US having the highest statutory corporate tax rate in the developed world in 2017. The US rate was well above that of the Organization for Economic Co-operation and Development countries. The TCJA provided a massive correction— by cutting the federal corporate tax rate by 14 percentage points, from 35% to 21%, a 40% reduction.
  • The rate cut was seen as important to keep the U.S. competitive against other countries as a destination for capital investment.
  • While it has been only a year and a half since the TCJA became law, there is some, albeit limited, evidence on how it is affecting the economy.

2. Corporations’ profits returning from overseas to the U.S.A.

  • The TCJA has had a discernible impact on repatriations, when US corporations bring back and realize overseas profits in the US. Repatriations saw a massive increase in the first quarter of 2018, and though the trend has slowed, repatriations are still well abovetheir pre-TCJA levels.
  • Inversions — when a US corporation restructures so it is headquartered in a foreign country, typically for tax purposes — are down.

3. Companies are investing in the U.S.A., building plants and increasing capacity

  • Physical capital formation, as measured by changes in gross domestic fixed nonresidential investment, has grown 4.61 percent since the law’s passage in 2018.
  • Equipment investment, which received special treatment due to the TCJA’s expensing provision, has also been growing since the TCJA.

 4. Wages are up and unemployment is down

  • Wages have been growing at a nominal rate of above 3 percent since the TCJA.
  • Unemployment has dropped below what most analysts think of as full employment, and wages and incomes have both increased.
  • Employee compensation rose 5.5 percent in 2018 and 3.4 percent in the first six months of 2019 alone (i.e., an annual rate of 6.8 percent). This is up from the 4.5 percent growth in 2017.
  • Personal income grew 4 percent in 2018. Clearly, the labor market has been improving since the tax law was passed.

5. American families are receiving an increase in after-tax income

  • Most families received a tax cut because of the TCJA…. the average household paid approximately $1,600 less in 2018 than they would have under prior law, with middle-income households receiving a $900 increase in after-tax income.
  • Total amounts of tax refunds remained the same or decreased due to the TCJA for most income thresholds, except for the $250,000 to $1,000,000 income group.
  • For the richest taxpayers, ….the deduction amount has resulted in marginally higher taxes paid. Other provisions have also raised taxes on high income earners.

6. The TCJA discourages corporations from storing profits overseas.

  • The TCJA included substantial changes in the international tax system that US multinationals have to adhere to. Under the earlier system, companies had an incentive to store profits overseas, since repatriated profits were subject to the high corporate rate of 35 percent. Several new provisions have now replaced that system of deferral. Instead of being able to avoid taxation indefinitely by keeping profits overseas, companies now owe a one-time tax on all previously accumulated profits stored overseas since 1986.

7. The full Impact of the TCJA will be seen over a longer period of time

  • Impacts on investment and wages are typically shown to occur over much longer periods, definitely longer than a year and a half.

Here is a link to this article on the site of the American Enterprise Institute: Don’t Give up on Tax Cuts/Jobs Acts

Aparna Mathur, Ph.D., is a resident scholar in economic policy studies at the American Enterprise Institute. Ms. Mathur has been an adjunct professor at Georgetown University’s McCourt School of Public Policy and has taught economics at the University of Maryland. She received her Ph.D. in economics from the University of Maryland, College Park.

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