Thursday, July 29, 2021
William G. Gale (Tax Policy Center; Google Scholar) & Claire Haldeman (Tax Policy Center), The Tax Cuts and Jobs Act: Searching For Supply-Side Effects:
The Tax Cuts and Jobs Act of 2017 (TCJA) instituted the most substantial changes in taxation in decades and was designed to boost the economy via supply-side incentives. This paper reviews these changes and examines the impacts on economic aggregates through 2019. The Act clearly reduced revenue. The effect on GDP is difficult to tease out of the data. Investment growth rose after TCJA was enacted but was driven by trends in aggregate demand, oil prices, and intellectual capital that were unrelated to TCJA’s supplyside incentives. Growth in business formation, employment, and median wages slowed after TCJA was enacted. International profit shifting fell only slightly, and the boost in repatriated profits primarily led to increased share repurchases rather than new investment.
TCJA was advocated as a way to increase tax-based supply-side incentives that could boost the economy. Discerning the short-term impact on GDP is difficult. But TCJA clearly reduced federal revenues significantly and several pieces of evidence suggest that TCJA’s supply-side incentives had little effect on investment, wages, or profit-shifting. As discussed in Auerbach (2006), Clausing (2019) and Kopp et al. (2019), the insensitivity of aggregate investment to tax incentives may be due in part to a rise in economic uncertainty or to increasing market power of big businesses in the economy. But the U.S. Census Bureau (2019) data on business formation and the Goodman et al. (2021) results on the effects of the passthrough deduction imply that the insensitivity of business choices to taxes appears to hold at the business start-up level, too.
The major caveat to our work is that the results are short-term and based on aggregate data. Ultimately, research using micro data (perhaps along the lines of Cummins, Hassett, and Hubbard (1995) or Zwick and Mahon (2017)) will extend our understanding of the impact of TCJA. But the COVID pandemic may make research into longer-term effects of TCJA difficult.