The 2017 Tax Reform Delivered as Promised

As Karl Popper has demonstrated, the evaluation of a scientific proposition requires the possibility of fabrication — theories or hypotheses cannot be proved or disproved if they cannot be tested empirically. When the Tax Cuts and Jobs Act of 2017 passed, we were criticized for being overly optimistic about the effects we predicted would have. Now the proof is there. Our critics were wrong, and the economic data met or even exceeded our predictions.

In 2017, we predict that lowering the federal corporate tax rate from 35% to 21% and adopting full cost of investing in new equipment will boost productivity-enhancing business investment by 9%. Although business investment growth slowed in the years leading up to 2017, after tax reform it accelerated. At the end of 2019, it was 9.4% above the pre-2017 trend, which is entirely in line with our models’ predictions. Looking only at corporate businesses — those most directly impacted by business-tax reform in 2017 — actual investment jumped 14.2% over pre-2017 trends, more than a little more than we expected. Among S&P 500 companies, total capital expenditure in the two years following the tax reform was 20% higher than in the previous two years, when capital expenditure actually fell.

Citing an extensive empirical literature, we also predict that by enhancing the bargaining power of workers and increasing new investment in domestic plant and equipment, the average household will receive an actual income of $4,000 within three to five years. In 2018 and 2019, median real household income in the United States increased by $5,000 — a larger increase in just two years than the entire eight years of the previous recovery combined. In 2019 alone, median real household income increased by $4,400, more than in the eight years from 2010 to 2017 combined.

Those extra wages also contribute additional tax revenue. We predict that while corporate income tax revenue declines in the short term as companies increase investment in new equipment, the combination of increased economic growth and reduced corporate earnings drivers going abroad will lead to a positive net sales effect in the long run. Before the reform, American companies moved their profits abroad to avoid the highest taxes of any advanced economy. After the reform, we predict that more profits will be recorded at home. For every dollar placed at home will benefit the US Treasury, since 21% of a positive number is much larger than 35% of zero.

Commentators have recently noticed that in fiscal 2021, not only is federal corporate tax revenue hitting a record high, but corporate tax revenue as a part of the U.S. economy Realized corporate tax revenue in 2021. $46 billion higher than the Congressional Budget Office’s post-reform forecast. Although the US economy is only slightly larger in 2021 than the CBO predicted, corporate tax revenue as a percentage of gross domestic product is still 21% higher (1.7% vs 1.4%) ).

Some have attributed this good news to a pandemic-related transient impact rather than tax reform in 2017. However, in President Biden’s latest budget, the administration’s baseline forecast for revenue from corporate taxes (i.e., before the revenue effects of the budget proposals) are now higher than the CBO’s pre-2017 forecast for each of the years from 2023 to 2027. This holds true for both corporate tax rates. and GDP share. This optimistic forecast is in line with our view of the long-term nature of tax reform’s effects and inconsistent with critics’ claims that it has no effect.

Why do corporate tax revenues not only grow at a much higher rate, but also account for a larger share of the U.S. economy? The reason is exactly what we foretold in the President’s 2018 and 2019 Economic Reports. By nullifying favorable tax treatment for the sale of intellectual property services abroad through a foreign subsidiary and by taxing corporate income previously Among those foreign subsidiaries, the 2017 tax law has created an effective incentive for multinational enterprises to repatriate profits.

As a result, domestic pre-tax income not only grew by a larger percentage of total pre-tax income from 2019 to 2021, but also grew more widely for companies with larger foreign earnings from intellectual property, which means that these companies have moved intellectual property back to the United States or identified little new intellectual property outside of the United States

This is reflected in aggregate international transaction data from the Office of Economic Analysis, which shows that companies repatriated only 36% of their income abroad the previous year and reinvested 70% abroad. , in the years leading up to 2017. Since 2019, they have repatriated an average of 57%, and reinvested only 47% abroad. Overall, since 2017, companies have repatriated $1.8 trillion of their former overseas earnings.

In addition, the average annual value of foreign asset acquisitions by US companies in 2018 and 2019 was 50% higher than in the previous two years, while asset acquisition activity by US companies foreign companies in the US down 25%. Multinationals find the idea of ​​being based in the US and pursuing acquisitions abroad increasingly appealing. On the other hand, US companies are increasingly disinterested in being acquired by foreign multinationals and reside in lower tax rate jurisdictions.

One of the exciting aspects of academic discovery is the opportunity to test theories and hypotheses against real-world data. In 2017, we put our hypotheses on the impact of corporate tax reform in the public record and passed the test. The White House and Democrats in Congress should think twice about undoing corporate tax reform, and partisan economists should point their criticisms to something else.

Mr. Goodspeed is a member of the Hoover Institute and served as Acting Chairman of the White House Council of Economic Advisers, 2020-21. Mr. Hassett was an outstanding tour member at Hoover and chair of the board, 2017-19.

Journal Editorial Report: However, Karl Rove says there are limits to the power of his endorsement. Image: Getty Images Synthesis: Mark Kelly

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