The centerpiece of the Tax Cuts and Jobs Act that passed in December 2017 was without a doubt the large cut in the federal corporate income tax rate from 35 to 21 percent. While several other changes to the tax code were made as well, both on the individual side as well as the business side, it was the corporate rate cut that was expected to boost economic activity, lead to higher investments and economic growth, and ultimately help bolster wages for working Americans. Recent research in economics, including a paper that I co-authored with Kevin Hassett, suggests possible linkages between corporate rate cuts and wages (Hassett and Mathur, 2015).

While it is hard to predict exactly how much the cut in the headline corporate rate would translate to wage growth, the general idea is not disputed—making the U.S. corporate tax rate more competitive with the rest of the Organization for Economic Co-operation and Development (OECD) economies would be beneficial for workers and for the economy.

However, one year later, things look quite a bit more complicated. As other provisions that remained largely less understood during the tax debate are starting to bite for companies and individuals, the narrative about the TCJA as simply one large tax cut for rich corporations and wealthy taxpayers, is starting to look naïve. So how exactly are companies, and households, faring under the TCJA one year later, and what implications does this have for the economy?

Before we discuss the new law, it is worth highlighting the issues that the TCJA was attempting to fix in the old law. A fundamental problem with the pre-TCJA law was that the U.S. corporate tax rate was well above that of other OECD economies. A Congressional Budget Office (CBO) 2017 report shows that the U.S. had the highest statutory rate in the G-20, and the third highest effective corporate tax rate (CBO, 2017).

Research suggests that this leads to a situation where companies are more likely to shift capital and investment from high-tax to low-tax countries, controlling for other factors (Devereux and Griffith, 1998). If firms do not physically relocate to low-tax countries, they can still invert to low-tax countries or shift profits overseas (Neely and Sherrer, 2017). A 2017 report from the CBO estimated that the cumulative impact on corporate tax revenues by 2027 for the U.S. would be a decline of 2.5 percent due to such erosion of the corporate tax base (CBO, September 2017).

In addition, our corporate tax code attempted to tax overseas profits of U.S. multinationals by taxing any money repatriated to the U.S. parent company by foreign subsidiaries. This created incentives to keep foreign profits overseas rather than repatriate these profits as dividends and then be subject to additional taxation. By some estimates, more than $2.5 trillion of corporate earnings were “locked-out” overseas rather than brought back to the U.S (Neely and Sherrer, 2017). The idea behind the TCJA was to stop taxing companies on repatriated dividends, so that there is an incentive to bring some of that cash back to the U.S. and reinvest it here, which would result in higher domestic tax revenues.

The TCJA made the following significant changes. The first was the cut in the headline corporate tax rate to 21 percent, bringing the U.S. rate close to the OECD average. In addition, to further provide a boost to short-term investment, the TCJA introduced expensing on equipment and machinery for a period of five years. To address the repatriation issue, the TCJA now exempts dividends repatriated to the U.S. parent from taxation, while placing a one-time tax on foreign profits accumulated overseas. Finally, in order to address the base erosion issue and ensure that companies pay a minimum tax on foreign earnings, and also to create incentives for companies to locate intangible income in the U.S., the TCJA has introduced three new international tax provisions, titled GILTI, FDII and BEAT. I discuss these later in the text.

On the individual side, there were minor changes to the personal income tax rates, the elimination of personal exemptions and a doubling of the standard deduction. Households were positively impacted by an expansion of the child tax credit. However, several high income taxpayers suffered due to the limitation on state and local tax deductions, and property taxes.

This article explores how companies, households, and the economy are doing in the post-TCJA economy. As is becoming increasingly clear, the easiest thing to understand about the TCJA was the rate cuts. Beyond the rate cuts, several new provisions are exceedingly complex and will require several rounds of Treasury guidance and rules. This is creating uncertainty for companies, as well as taxpayers, as they attempt to figure out how to respond to the new law. So if we are waiting for the quick boom in investments and economic growth, that may be a while coming.


On the face of it, the corporate tax cut is working as one would imagine. Let’s look at several metrics that are expected to be impacted as a result of the tax cut. These metrics are physical capital investments, employment and wages, and worker productivity. Other indicators that are also worth tracking are repatriations, inversions, and stock buybacks.

Investment Impacts

Data from the Bureau of Economic Analysis shows that gross domestic private investment has been trending up, though it has been trending up since before the passage of the TCJA in December 2017. If we look in particular at investments in equipment and machinery, those do appear to have accelerated since 2017, some of which could be a consequence of the expensing provisions. But again, the uptick appears to have started before the passage of the TCJA in December 2017. So, while investment is up, and some of it can probably be linked to the tax law, not all of it can be claimed to be a consequence of the new law.

Labor Market Impacts: Wages and Productivity

Second, the labor market also looks strong. Nominal wages have been growing at above 3 percent over the previous year, which is a promising outcome, and employment gains have been solidly above 250,000 over the previous year. In fact, it is surprising how strong job gains have been on a sustained basis and how many workers have continued to trickle into the labor force, despite having reached what many believed was “full employment” more than a year ago. Again, the important thing to highlight here is that employment and wage gains were consistently on an upward trajectory even before the passage of the TCJA.

At the same time, worker productivity has been trending up. As per data from the BLS, labor productivity in the nonfarm business sector rose 1.3 percent from the second quarter of 2017 to the second quarter of 2018. Real output has risen 3.5 percent over that same period, and hours worked have increased 2.2 percent.


Another interesting indicator to track is repatriations. Remember, that under the old corporate tax system, companies had an incentive to store foreign earnings overseas, either as cash or reinvested earnings, because of the tax on repatriations that would apply if those dividends were returned to the U.S. parent. By some estimates, companies had more than $2.5 trillion held overseas in “locked-out” earnings due to this provision. Under the new law, repatriated dividends are exempt from taxation. How has this impacted repatriation? As per the Bureau of Economic Analysis, for the first three quarters of 2018, repatriated dividends amounted to $571 billion, which does reflect a response to the TCJA- and is more than four times what we saw in the first three quarters of 2017 (BEA, 2017). An earlier analysis by the Federal Reserve also showed a significant increase in quarter 1 repatriations, amounting to nearly 30 percent of the estimated stock of offshore cash holdings (Smolyansky et al., 2018).

Finally, while there is a tremendous amount of concern that companies are simply using the cash from the tax cuts to buyback stocks, it is important to note that stock buybacks are not necessarily a bad thing. One, if money is returned to shareholders and investors, they can use it for additional investments or consumption, both of which may be beneficial for the economy at large. Second, buybacks do not replace investments in capital that companies would be making otherwise. A recent article from Harvard Business Review shows that even in the period prior to the TCJA, companies in the S&P 500 distributed significant levels of cash to shareholders through stock buybacks and dividends, but simultaneously continued to fund substantial investments in capital and R&D (Fried and Wang, 2018).

Hence along all these dimensions, while some indicators are looking strong, and others are trending along on their long run paths, things are generally moving in the right direction. Of course, we have to note that the general economic recovery has also been a significant factor when it comes to indicators like employment, wages, and productivity.


Going forward, the picture looks a lot more complicated. That is a consequence of the fact that the TCJA was about more than just a corporate rate cut. In addition, while it helped higher income households relatively more than lower income households through provisions like the child tax credit and rate cuts, it also took away many provisions that higher income households depended upon to lower their tax bill, such as the state and local tax deductions. So how are companies and individuals faring under these changes?

Complicated Business Side Changes

On the business side, the most important thing to note is that the TCJA included more than just the rate cut and expensing provisions. While a rate cut per se may create incentives for companies to invest in projects that now yield higher after-tax returns, other provisions of the TCJA may move this incentive in the opposite direction. For instance, while we moved away from a system of taxing repatriated dividends, we still continue to tax the foreign earnings of US multinationals. This is done in multiple, confusing ways.

First, under the earlier system, companies had an incentive to store earnings overseas in order to avoid the tax on repatriated dividends. Under the new law, companies are liable to pay a one-time tax on these accumulated, post-1986 deferred earnings, at a rate of 15.5 percent on cash and 8 percent on assets. Typically, these payments are allowed over a period of eight years. However, some companies are realizing that they may owe those payments right away due to certain rules. The Treasury has only recently started putting out these rules and clarifications, so it will take time for companies to figure out whether they owe taxes right away or can repay over the next several years.

Second, the TCJA introduced three new international provisions—GILTI, BEAT and FDII, that are extremely complicated for companies to figure out. GILTI refers to global intangible low-taxed income. The easiest way to think about this provision is that it is a new, worldwide minimum tax that US multinationals now face on certain high foreign returns. Therefore, if a company has foreign invested assets that earn more than a 10 percent return, then that return will be subject to a GILTI tax of about 10.5 percent. While this tax rate is lower than the new U.S. corporate tax rate of 21 percent, it is effectively higher than the zero tax on foreign earnings under the old law that allowed deferral. So in many ways, the tax base subject to U.S. corporate taxes is now much wider than before, which increases tax liabilities. In addition, the rules are not easy for companies to figure out. And as companies are learning, the expense allocation rules are in fact resulting in tax rates significantly higher than 13.125 percent (Sullivan, 2019). The GILTI minimum tax is possibly one reason why U.S. companies are still choosing to “invert” i.e. move their headquarters to a foreign location (Pomerlau, 2018).

FDII refers to foreign-derived intangible income, which offers a lower tax rate on domestic intellectual property over and above a 10 percent assumed normal return. The hope is that FDII will encourage companies to keep more of their intellectual property in the U.S and serve foreign markets from the US. FDII income is allowed a deduction of 37.5 percent, bringing the effective tax rate (ETR) to 13.125 percent. The uncertainty with FDII is whether it is compliant under World Trade Organization rules or whether it will face a challenge as an export subsidy. That calls into question whether the provision will last over time, so that when companies are relocating intellectual property in the U.S. they have a reasonable guarantee that they can take advantage of the FDII deduction over the next several years. The Treasury has recently issued guidance to offer clarifications on some of the rules, but it will be several months before final regulations are provided. There is also concern that it might create incentives for some companies to shift tangible capital abroad (Rubin, March 2019).

BEAT refers to the base erosion and anti-abuse tax. It addresses the issue of base erosion payments made by US corporations to foreign subsidiaries. However, again as companies are figuring out, BEAT covers much more than just payments that might be considered tax avoidance. In fact, several routine transactions between companies and their foreign subsidiaries are subject to the new BEAT tax, resulting in tax rates on U.S. companies that are higher than 21 percent. The BEAT can apply even if base erosion payments are made to high-tax jurisdictions, and provide little by way of tax benefit (Sullivan, 2018). It is also possible for large U.S. corporations with gross receipts over $500 million to simultaneously be subject to BEAT as well as the tax on GILTI income. (Sullivan, 2019). A recent article shows how companies are restructuring internally in order to avoid paying the BEAT tax (Rubin, January 2019).

All of these international tax provisions are supposed to reduce incentives to shift income overseas, but companies are still figuring it out. For instance, what will be the investment response to GILTI and FDII? How are companies responding to the BEAT provisions? And how does all of this fit into the OECD’s BEPS framework? In a recent working paper, Kartikeya Singh and I show that accounting only for GILTI and FDII, companies facing even a small transaction cost of shifting “economic substance”, such as people functions and capital, overseas, would still prefer to locate new investments in the U.S. However, how all of these incentives will be affected when we take into account the interactions between the three provisions, is still unclear (Mathur and Singh, 2011).

Another business side provision, the pass-through deduction, may also be expected to create the right incentives for businesses to invest in capital, by lowering the marginal tax rate applicable to certain size businesses. However, as research from the Tax Foundation has shown, the provision is complicated for businesses to figure out—the deduction depends upon the nature of business activity, the total income of the owner, the amount of wage income paid, how much property the business owns, and the skill or reputation of the owner. More importantly, many businesses may actually face a tax hike due to the phase-in of the limits on the deduction. Also, the temporary nature of the provision makes it less likely that businesses will expand investments in long-lived assets (Greenberg and Kaeding, 2018).

Other aspects of the bill, such as the limitation on net interest expense deduction to 30 percent of adjusted taxable income and the additional limits on net operating loss carryforwards, are also a hit to companies (Brandon Elliot, 2018).

Complicated Individual Side Changes

On the individual side again, while the simplest thing to understand is the rate reduction, the bill is far more complicated affecting families in heterogeneous ways. The TCJA fundamentally restructured the tax code’s treatment of the size and composition of households by nearly doubling the standard deduction, eliminating the personal and dependent exemptions, creating a $500 nonrefundable credit for non-child dependents and expanding the child tax credit. The expansion of the child tax credit included increasing the maximum credit from $1,000 to $2,000 per child and significantly raising the phase-out thresholds. Although the refundable portion only increased to $1,400 indexed to inflation, the threshold for the refund phase-in through the additional child tax credit decreased from $3,000 to $2,500.

The TCJA also reformed many deductions, including both expansions and reductions of these tax items. The TCJA eliminated the itemized deductions for casualty expenses (excluding 2016 disaster areas and several major disasters from 2017) and for certain miscellaneous expenses, limited the mortgage interest deduction to interest on mortgage debt up to $750,000 for acquisition only (from $1 million for acquisition and $100,000 for other home equity indebtedness), and capped the state and local tax deductions at $10,000. The TCJA also expanded the deduction for charitable contributions by raising the ceiling as a fraction of AGI from 50 to 60 percent, reduced the floor on the medical expense deduction for nonelderly filers from 10 to 7.5 percent of AGI for 2017 (retroactively) and 2018, and eliminated the Pease limitation on itemized deductions.

In addition to these itemized deductions, the TCJA eliminated the deductions for moving expenses and the exclusion of employer-provided moving expense reimbursements, and it eliminated the deduction for alimony paid and added an exclusion of alimony received from taxable income. Finally, the TCJA changed the price-indexing mechanism from CPI-U to chained CPI—a measure that allows for substitution effects and ultimately calculates inflation to rise more slowly. Nearly all of these individual income tax provisions are set to expire in 2026, with the notable exception of the chained CPI indexing, which is permanent.

In a recent paper that I co-authored with Cody Kallen, when we study only the individual side provisions, we find that in the immediate period following the tax reform, some households are hit harder than others (Kallen and Mathur, 2019). In 2019, most households should experience lower average tax rates than prior to the TCJA, but within each group, some households will receive a tax hike and some a tax cut. For instance, within the top 1 percent, nearly three-fourths will receive a tax cut, averaging over $9,000, while one quarter will face a tax hike relative to pre-TCJA law. Hence, even among those of the same income-level, there are interesting variations in regards to which families will benefit and which will pay higher taxes due to the individual income provisions. These distributional results remain largely unchanged until 2026. In that year, with the expiring of nearly all the individual provisions, there is a dramatic change with about 99 percent of households in the upper income distribution, as they will experience a tax hike relative to current law. Even among lower income households, a large fraction, close to 50 percent, experience a tax hike.

A second manner in which some high income executives will be hit by the TCJA is due to the expanded tax code Section 162(m). This limits the deduction public companies can take for compensation of more than $1 million paid annually to executives. Under earlier law, companies were allowed a deduction of $1 million on performance based pay. This deduction is now no longer available, which effectively means higher tax rates for companies and top executives. In combination with the limitation on state and local tax deductibility, high-income taxpayers in states like California and New York will pay an additional 13 percentage points on top of federal rates (Looney, 2019).

Impact on Debts, Deficits, and Economic Growth

Finally, despite the economic growth we might still get from the TCJA, there is also the drag on growth from the deficits projected from the act. Under the TCJA, revenues and outlays are both anticipated to rise, but the gap between the two will widen, increasing the deficit. Before taking into account dynamic economic feedbacks, the CBO estimates that the TCJA would increase the deficit by $1.8 trillion and debt-services by $450 billion across an 11-year projection window. The economic feedback, driven primarily by the fact that the TCJA largely increases taxable incomes, would reduce the deficit by about $550 billion (McClelland and Werling, 2018).

Therefore, while the TCJA would certainly raise tax revenues in some ways and spur economic growth and investment, there is a significant net increase in the deficit. After 2025, when many of the provisions of the TCJA expire, the projected deficit estimates under the TCJA and, in a counterfactual manner, without the passage of the TCJA are quite similar. In fact, the deficit decreases in 2026 slightly below its projected levels in the absence of the TCJA. This is driven by the permanent change from using CPI-U to chained CPI, which rises more slowly since it accounts for substitution effects.

As reported recently by the CBO, corporate income taxes decreased by $14 billion in the first five months of fiscal year 2019, as compared to the first five months of the year prior. This is a 19.2 percent decline in revenue, mainly attributed to the change in the top statutory rate from 35 to 21 percent. In total, tax receipts—from individual income taxes, payroll taxes, corporate income taxes, and other receipts—decreased by 0.3 percent for the first five months of fiscal year 2019 (CBO, March 2019).


To conclude, while the Tax Cuts and Jobs Act is largely viewed as a tax cut for rich corporations and wealthy taxpayers, there is much more to the bill than the rate cuts. In this article, I have highlighted how several metrics that were commonly assumed to perform better after the rate reform are working. Along these dimensions, such as investment, wages, and productivity, the trends are generally positive post-TCJA. But many of these are also highly correlated with the general economic recovery and show no break in trend post-TCJA. Other indicators, such as repatriations, have jumped significantly as a result of the TCJA.

Going forward, however, other aspects of the tax bill, such as the international provisions, are likely to play a much larger role in influencing decisions about the location of investments, which will have implications for the economy. Companies are only now having to figure out GILTI, FDII, and BEAT, and the interactions between them. And there is a tremendous amount of uncertainty and complexity that the TCJA has introduced across a variety of dimensions, not just for companies but for households as well. Hence while not a whole lot is clear about how the TCJA will impact the economy in the long-run, the one thing that is clear is that the TCJA was anything, but a simple tax reform.

Aparna Mathur (@aparnamath) is a Resident Scholar in Economic Policy Studies at the American Enterprise Institute. Aparna would like to thank Erin Melly for research support with this article.


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