In December 2017, the US passed the largest corporate tax cut in US history. It was called the Tax Cuts and Jobs Act (TCJA) but most people referred to it as the “Trump tax cuts”. Advocates of the legislation promised that the cuts would boost investment, spur economic growth, and increase wages, ultimately benefiting the broader US economy. Meanwhile, opponents said it would mostly benefit large companies and rich people, increasing inequality and ballooning the tax deficit.

Now, with several years of data available, economists have started to assess the actual impact of the reform — and it’s not looking all that good.

Projections versus results

The TCJA reduced the top corporate tax rate from 35% to 21%, marking the first major overhaul of the U.S. corporate tax system in over 30 years. Along with the rate cut, the act introduced several provisions designed to boost corporate investment. Corporations could immediately deduct the full cost of certain investments. Additionally, the US moved away from a worldwide tax system (where companies are taxed on global income) to a territorial system (where only profits from the US were taxed).

The idea was that companies would be encouraged to invest in equipment and the U.S. corporate tax system would become more competitive internationally. Companies would be encouraged to bring back profits held overseas, raising wages for American workers.

These provisions had mixed results, writes Harvard macroeconomist Gabriel Chodorow-Reich, author of a new analysis. Companies did invest more indeed, but the uptick in investment was not nearly enough to offset the revenue loss from the tax cuts. The increase in workers’ income was also far more modest than initially claimed. Research has indicated that while there were some wage increases, these were concentrated among high-income earners rather than benefiting the broader workforce. The widely advertised wage increases of $4,000 to $9,000 per household failed to materialize. The average wage increase attributable to the tax cut has been estimated at around $700 per worker, far below the predictions made by the bill’s proponents​.

“You can have a glass half-full or half-empty view on whether that’s a little or a lot,” Chodorow-Reich said. “But it is certainly well less than what some of the tax cut’s proponents suggested.”

Minor improvements

In terms of overall economic growth, the TCJA has had a limited impact. Long-term growth estimates suggest that the tax cuts have contributed to a modest increase in GDP — approximately 0.9% over a decade​. This is much smaller than the robust growth projections made at the time of the bill’s passage. While the cuts did boost investment in the short term, the long-term economic “bang for the buck” has been lower than expected.

“People may look at what happened with corporate income and say, ‘Hey, look! Tax cuts pay for themselves through higher investment!’ But that’s just not what we see in the data. Others may want to raise corporate taxes, because they think taxes have no effect on corporate policy. But that’s not what we see in the data, either,” says Chodorow-Reich

Overall, after years of data being analyzed, the actual economic effects of the tax on growth and wages have been far more modest than initially claimed, and the deficit to the federal budget has been substantial. Given the scale of the tax cuts, many economists warned that they would result in a substantial increase in the national debt, especially if the predicted economic growth failed to materialize. This concern has proven to be well-founded.

Major costs

The projected benefits didn’t materialize, but the costs did.

The main takeaway is that corporate tax cuts are expensive for the entire country. The Trump tax cuts reduced corporate tax revenue by roughly 40%, contributing to a significant increase in the federal deficit. This makes the cuts fiscally unsustainable unless paired with substantial spending reductions or revenue increases elsewhere.

Also, the design of the tax cut matters a lot. Some provisions, such as full expensing (an allowance for companies to claim a deduction from taxable profits), delivered better results in terms of encouraging new investment compared to blanket corporate tax rate cuts, which disproportionately benefited owners of existing capital​. In other words, blanket tax cuts just help the rich get richer.

There’s always a bit of room for interpretation when it comes to this type of large-scale fiscal reform. But at a cost of $100 to $150 billion for the US budget over 10 years, this is a hefty cost to pay. It drove the national debt up substantially and it’s something that Americans will have to pay in the coming years.

With deficits continuing to grow and income inequality remaining a major concern, the tax cut serves as both a case study in the potential and limitations of business tax reform and a reminder of the complexities of corporate taxation in a global economy. This is all the more important as key provisions are set to expire in 2025.

If lawmakers want to truly decide what’s best for the people, they need to carefully weigh the costs and benefits of corporate tax cuts and designin policies that maximize economic impact without undermining fiscal sustainability.

Journal Reference: Gabriel Chodorow-Reich et al, Lessons from the Biggest Business Tax Cut in US History, Journal of Economic Perspectives (2024). DOI: 10.1257/jep.38.3.61