When (US) Corporate Tax Rates Reductions Last Bloomed

Under the Tax Cuts and Jobs Act, no enormous surge in capital investment appeared, above and beyond what could be explained by aggregate demand changes. From the conclusion to U.S. Investment Since the Tax Cuts and Jobs Act of 2017, by Emanuel Kopp, Daniel Leigh, Susanna Mursula, and Suchanan Tambunlertchai.

In the year following the passage of the TCJA, U.S. business investment grew strongly  compared to pre-TCJA forecasts and outperformed investment growth in other major  advanced economies.

Evidence suggests that the overriding factor supporting that growth has been the strength of  U.S. aggregate demand, likely propelled by higher disposable household income or wealth  gains due to the tax cuts and the government spending stimulus from the BBA which occurred simultaneously. While the increase in business investment is undoubtedly positive for economic activity as it increases capital stock and supports productive capacity, the  aggregate demand boost could fade as the spending bill and personal income tax cuts expire.

Investment growth in 2018 was also below predictions based on the historical relation  between tax cuts and investment as identified by a range of studies in the empirical  literature.  We estimate that policy uncertainty and, especially, the stronger corporate market  power compared to previous postwar episodes of tax policy changes reduced the relative  impact of the TCJA on business investment. The rise in corporate market power can account for a large part of the observed gap, offering a new explanation for why investment has not been stronger. Once these two factors are accounted for, other factors appear to have played a limited role (or their effects may have offset one another).

Our results suggest that in an environment of rising market power, corporate tax cuts become less effective at raising investment. They also support the notion that reducing economic  policy uncertainty could result in further growth in business investment.

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