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Trump’s Corporate Tax Cut Is Not Trickling Down
Business investment is slowing, despite lofty promises, and worker bonuses were a mirage.
Two years ago, President Donald Trump and Republicans in Congress cut the corporate tax rate from 35 percent to 21 percent via the Tax Cuts and Jobs Act of 2017 (TCJA). At the time, the Trump administration
claimed that its corporate tax cuts would increase the average household income in the United States by $4,000. But two years later, there is little indication that the tax cut is even beginning to trickle down in the ways its proponents claimed.
First, slashing the corporate tax rate would increase corporations’ after-tax returns on investment, inducing them to massively boost spending on investments such as factories, equipment, and research and development. This investment boom would give the average worker more and better capital to work with, substantially increasing the overall productivity of U.S. workers. In other words, they would be able to produce more goods and services with every hour worked. And finally, U.S. workers would capture the benefits of their increased productivity by successfully bargaining for higher wages.
According to
President Trump’s Council of Economic Advisers (CEA), this process would “in the medium term boost the average U.S. household income annually in current dollars by at least $4,000, conservatively.” CEA’s “optimistic” estimate of the average household’s raise was $9,000. Then-CEA Chairman Kevin Hassett
claimed that it would take “three to five years” for these massive trickle-down effects to materialize. A number of critics noted that the Trump administration’s claims were unlikely to pan out, in part because they hinged on the same supply-side economics that decades of tax cuts for the wealthy have consistently discredited.
These critics emphasized a number of flaws with the CEA’s theory of the case. First, corporations were holding large amounts of cash. Second, they were able to access capital very cheaply with interest rates at historic lows for almost a decade. Third, the effective tax rates on U.S. corporate investment, especially debt-financed investment, were already quite low, indicating that the cost of capital—let alone the portion attributable to taxes—was hardly holding back corporate investment. The critics noted that greater corporate market power meant that corporate profits consisted largely of economic rents, not marginal returns on investment. Therefore, a new corporate tax cut would, even if effective, likely be passed onto shareholders rather than being reinvested by the firms receiving the tax cut. Critics emphasized further that even if the tax cuts sparked an investment boom that increased productivity, it would be far from clear whether workers would be able to capture the gains, given the power imbalances between U.S. workers and employers.
The promised boom in business investment never happened
Corporate revenue has dropped precipitously since Trump’s tax cut
Perverse incentives in the TCJA may be encouraging investment overseas rather than in the United States
The ballyhooed tax cut bonuses were a mirage
Conclusion
the evidence from the first two years suggests that corporate tax cuts are draining revenue from the U.S. Treasury while doing little that would ultimately benefit U.S. workers. Instead of trickling down to workers, the 2017 tax cuts have largely served to line the pockets of already wealthy investors—further increasing inequality—with little to show for it.
Business investment is slowing, despite lofty promises, and worker bonuses were a mirage.
www.americanprogress.org
