The Tax Cuts and Jobs Act was passed in late 2017 and went into effect in 2018. For academic research to analyze the effects, that’s still a very recent change, which can make analyzing the effects challenging. In this case the challenge is especially important because major portions of the Act will expire at the end of next year, and there will be a major political debate about renewing portions of it in 2025.
Despite these challenges, a recent Journal of Economic Perspectives article does an excellent job of summarizing what we know about the effects so far. In “Sweeping Changes and an Uncertain Legacy: The Tax Cuts and Jobs Act of 2017,” the authors Gale, Hoopes, and Pomerleau first point out some of the obvious effects:
- TCJA increased budget deficits (i.e., it did not “pay for itself”)
- Most Americans got a tax cut (around 80%), which explains #1 — and only about 5% of Americans saw a tax increase (~15% weren’t affected either way)
- Following from #2, every quintile of income saw their after-tax income increase, though the benefits were heavily skewed towards the top of the distribution ($1,600 average increase, but $7,600 for the top quintile, and almost $200,000 for the top 0.1%)
Beyond these headline effects, it seems that most of the other effects were modest or difficult to estimate — especially given the economic disruptions of 2020 related to the pandemic.
For example, what about business investment? Through both lowering tax rates for corporations and changing some rules about deductions of expenses, we might have expected a boom in business investment (it was also stated goal of some proponents of the law). Many studies have tried to examine the potential impact, and the authors group these studies into three buckets: macro-simulations, comparisons of aggregate data, and using micro-data across industries (to better get at causation).
In general, the authors of this paper don’t find much convincing evidence that there was a boom in business investment. The investment share of GDP didn’t grow much compared to before the law, and other countries saw more growth in investment as a share of GDP. Could that be because GDP is larger, even though the share of investment hasn’t grown? Probably not, as GDP in the US is perhaps 1 percent larger than without the law — that’s not nothing, but it’s not a huge boom (and that’s not 1 percent per year higher growth, it’s just 1 percent).
Ultimately though, it is hard to say what the correct counterfactual would be for business investment, even with synthetic control analyses (the authors discuss a few synthetic control studies on pages 21-22, but they aren’t convinced).
What’s important about some of the main effects is that these were largely predictable, at least by economists. The authors point to a 2017 Clark Center poll of leading economists. Almost no economists thought GDP would be “substantially higher” from the tax changes, and economists were extremely certain that it would increase the level of federal debt (no one disagreed and only a few were uncertain).
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