Study Says Federal Corporate Tax Rate Cut Led To Higher Capital Investment

According to a new study from economists associated with the National Bureau of Economic Research and the U.S. Department of the Treasury, the corporate tax reforms enacted as part of the Tax Cuts and Jobs Act (TCJA) in 2017 substantially raised U.S. capital investment and enhanced the country’s economic growth. Specifically, the study, which is based on a sample of 12,000 corporate income tax returns, found that, on average, firms affected by the tax policy changes increased domestic investment by about 20 percent in the subsequent two years relative to firms whose taxes did not change.

As a result of these findings, the researchers estimate U.S. domestic corporate capital stock will grow 7.4 percent over the long run because of the law. Most of the growth in investment and the capital stock is predicted to occur within 10 years, and nearly all of it should happen within 15 years.

When capital stock expands, worker productivity and wages improve too. As a result, the researchers predict a 0.9 percent increase in real wages over the long run.

Read the full study here.

As a reminder, the 2017 tax law was the largest federal corporate tax reform in the United States in a generation. It lowered the corporate tax rate from 35 percent to 21 percent, temporarily allowed full expensing for short-lived assets, and overhauled the international tax code. As the nonpartisan, nonprofit Tax Foundation this study bolsters the case for making full expensing permanent and expanding it to other assets. It also suggests that any proposals to raise the corporate tax rate could reduce U.S. investment, employee wages and productivity, and the overall economy.