Key provisions from the Tax Cuts and Jobs Act (TCJA) of 2017 are expected to expire Dec. 31, 2025. Policymakers are projected to preserve a majority of the TCJA provisions, which was the largest tax code overhaul in nearly three decades, but they will need to find a source of funding for the extensions. The goal of the one and a half trillion-dollar tax reform bill was to spur economic growth, reduce regulations, and create a more business-friendly environment in the U.S.
The TCJA was in many ways a recent test case for the theory that tax rates among other changes lowered the corporate tax rate from 35 percent to 21 percent and reduced the top marginal tax rate for households from 39.6% to 37%. At the time, the Trump administration’s Council of Economic Advisers claimed that “reductions in effective corporate tax rates have substantial, positive short- and long-run effects on output,” primarily by increasing “firms’ investment, desired capital stock, and potential output,” which would lead to “wage increases for U.S. households of $4,000 or more” and “much of this boost to U.S. output may be apparent in the near term.”
Supply side and neoclassical models, which rose to prominence in the 1970s and 1980s, champion a “free market”-centered view that frames taxes as the enemy of economic growth. However an analysis of the tax cuts by Harvard’s Gabriel Chodorow-Reich, Princeton’s Owen Zidar, and Chicago Booth’s Eric Zwick finds that the TCJA has boosted investment, as well as wages and economic activity—but not nearly enough to make up for substantial losses in corporate tax revenues that have increased the deficit. Analysts at the International Monetary Fund also found that 80 percent of the corporate tax cuts were repurposed into financial investments such stock buybacks and dividends, rather economic investments into productive resources that benefit the greater economy.
Discussion Questions:
1. Explain how lower marginal tax rates for firms and households can either increase the government’s total tax revenue or decrease them.
2. Discuss why a business may invest in new capital when corporate tax rates are reduced and how financial investments can be a distraction from this goal.
Sources| Chicago Booth: https://www.chicagobooth.edu/review/trump-tax-cuts-benefits-outweighed-lost-revenue; Bloomberg Government: https://about.bgov.com/insights/elections/2025-tax-policy-crossroads-what-will-happen-when-the-tcja-expires/#what-is-the-tax-cuts-and-jobs-act; Unsplash: Photo by Jainam Sheth on Unsplash