Long-term Macroeconomic Effects of the 2017 Corporate Tax Cuts
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In December 2017, President Donald Trump signed into law the largest corporate tax reduction since the Tax Reform Act of 1986 signed by President Ronald Reagan. The Tax Cuts and Jobs Act of 2017 (TCJA) reduced the top marginal tax rate levied on corporate income from 35% to a flat 21%, leading to extensive speculation on the anticipated effects of the tax cut on key economic variables. This study uses an objective methodology to project the long-term economic impact of the corporate tax cut by simulating business decisions that determine dividend issuance and equity valuation as well as household decisions that determine equity ownership and the U.S. wealth distribution.
In order to trace the effects of the corporate tax cut throughout the economy, a dynamic general equilibrium model with explicit corporate activity and an endogenous household wealth distribution is calibrated to the U.S. economy and modified to reflect the change in the corporate tax rate. The model’s baseline parameters are chosen so that the model matches key economic statistics, including firm-level values estimated from COMPUSTAT data and household values derived from the Survey of Consumer Finances (SCF) and other studies. To measure the long-run effects of the reform, several key values are computed after simulating the corporate tax reform and compared to the corresponding benchmark values.
The results show a modest decline in wealth inequality resulting from the decline in the corporate tax rate implemented in the TCJA. Although total wealth remains highly concentrated among individuals in the top quintile, the model shows a small shift in the concentration of wealth toward each of the bottom four quintiles. Other key economic variables, including wages, household consumption, and corporate investment, experience a moderate increase, while total output remains roughly unchanged. The economic variables most directly impacted by corporate tax cuts are average dividend issuance and equity valuation, which increase more significantly. Total corporate tax revenue declines by about 40%, but nearly 20% of that decline is recaptured through increased personal income tax revenue.
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