An Overview of the 2017 TCJA Impact

Introduction

A recent analysis of the policy proposals of Presidential Candidate Trump suggests that tax cuts may increase the deficit. The analysis subtracts the potential for reduced tax collections from the tariff revenue, but fails to consider the impact on economic growth.

Tax Cuts and the Rich

There is a common belief that tax cuts only benefit the rich. However, it's important to remember that the top 10% of income earners pay 59.1% of taxes, while the top 25% of income earners contribute nearly 70% of all tax revenue. The top 50% pay 97% of all taxes.

The Difference Between Statutory and Effective Tax Rates

Due to the complexities of the current tax code, there is a significant difference between the statutory tax rate and what corporations actually pay, known as the effective rate. In 2018, the effective corporate tax rate was reduced to 21%, yet the actual tax rate paid was around 14%. Today, despite no change to the statutory rate, the effective tax rate has risen to almost 17%.

The Psychological Impact of Tax Rate Changes

Changes to the statutory rate are more symbolic than actual. However, they have a strong psychological impact on employers. Increases in tax rates often lead to defensive posturing by companies to offset the impact of higher taxes. Decreases in tax rates, even if they have little impact on the effective rate, tend to provide economic benefits.

Three Examples of the Economic Benefit of Corporate Tax Cuts

Boost to Capital Investment

With lower tax burdens, companies retain more profits, which can be reinvested into expanding operations, developing new technologies, and conducting research and development (R&D). These investments improve productivity, drive innovation and foster long-term economic growth.

Example 1: The Tax Cuts and Jobs Act of 2017

The Tax Cuts and Jobs Act (TCJA) of 2017 slashed the U.S. federal corporate tax rate from 35% to 21%, creating a more favorable environment for business investment. In the aftermath, several major corporations announced significant capital investments in the U.S. economy. For instance, Apple committed to investing $350 billion in the U.S. over five years, with a portion of the investment attributed to the savings from the tax cuts.

Job Creation and Wage Growth

When companies reinvest their tax savings into business expansion, they often need to hire more workers to support the growth. Additionally, businesses may pass some of their tax savings to employees through higher wages, bonuses, or enhanced benefits.

Example 2: Walmart’s Wage Increases and Bonuses

Following the TCJA’s enactment, Walmart, the largest private employer in the U.S., announced it would raise its starting wage to $11 per hour and provide bonuses of up to $1,000 to more than a million employees. The company explicitly credited the tax cuts as a factor in its ability to increase wages and offer bonuses.

Enhanced U.S. Competitiveness in a Global Economy

In the era of globalization, corporate tax rates play a crucial role in determining a nation’s ability to attract and retain businesses. By reducing corporate tax rates, the U.S. can enhance its attractiveness to domestic and foreign corporations, encouraging investment and job creation within its borders.

Example 3: Repatriation of Foreign Profits After the TCJA

The TCJA included provisions encouraging U.S. companies to repatriate overseas profits. According to the U.S. Bureau of Economic Analysis, U.S. companies repatriated more than $664 billion in foreign profits in the year following the tax reform. This capital repatriation significantly boosted the U.S. economy.

Bottom Line

Corporate tax rate reductions in the United States have delivered tangible economic benefits, including increased capital investment, job creation, wage growth, and enhanced global competitiveness. The Tax Cuts and Jobs Act of 2017 is a key example of how reducing corporate tax rates can stimulate economic activity. Companies like Apple, Walmart, and Pfizer have used their tax savings to reinvest in the U.S. economy, create jobs, raise wages, and bolster their global standing. While the long-term effects of corporate tax cuts continue to be debated, there is no denying that, when implemented strategically, they can positively impact the broader economy. Furthermore, following the TCJA, tax receipts increased even though tax rates declined. Such is expected if the economy benefits from tax cuts. As the U.S. continues to navigate global economic challenges, corporate tax policy will remain important for encouraging business investment, job creation, and sustained economic growth. The tax policies of the next administration will play a key role in the economy and markets going forward. What do you think about this article? Share it with your friends and sign up for the Daily Briefing which is everyday at 6pm.