TOPLINE POINTS

• The Tax Cuts and Jobs Act was a central contributor to the economic success our Nation realized during the Trump Administration.
• Coupled with energy independence and deregulation, tax reform caused the American economy to realize rising wages, low prices, and historically low poverty levels.
• Parts of the Tax Cuts and Jobs Act began expiring at the end of 2022, removing some of the economic incentives that our Nation needs as we potentially enter a recession.
• As this paper explains, making the Tax Cuts and Jobs Act permanent will help the U.S. remain the best country in the world in which to live, work, invest, and prosper.

The Need for Tax Reform

Before the enactment of the Tax Cuts and Jobs Act of 2017 (TCJA), the U.S. was experiencing one of the slowest recoveries from a recession in its history. The Obama Administration’s anti-growth, redistributionist policies resulted in taking a full six years to recover the jobs that were lost during the 2008–2009 recession. Annual economic growth was averaging less than 2.2%, and Larry Summers and other liberal economists tried to convince the American people that this era of  “secular stagnation” was the new normal. As always, their solution was more government spending.

In response to these poor results, conservative Members of Congress and the Trump Administration pursued pro-growth tax reform. Rather than government-directed spending, proponents argued that by allowing American households to keep more of what they earned and increasing the portion of successful investments that American companies retain, the U.S. economy would emerge from the slow economic growth as a result of the Obama Administration. According to the 2018 Economic Report of the President, tax reform had four key components: tax relief for middle-income families, simplification for individuals, economic growth through business tax relief, and repatriation of overseas earnings.

Before TCJA was passed, the corporate income tax code in the U.S. had not been significantly revised since 1986. As shown in the figure below, the reduction in the federal corporate tax rate (adding in the state corporate tax rate) brought the average rate in 1986 in the U.S. below the average rate among other advanced economies. Although the U.S. corporate tax environment had stayed essentially constant since 1986, the rest of the developed world continually lowered their corporate income tax rates. As a result, by 2016, the U.S. had the highest corporate income tax rate (combined federal, state, and local taxes) among developed nations. As stated in the 2018 Economic Report of the President, “[i]n 2016, the average top statutory corporate tax rate (combined subnational and national) in OECD countries excluding the U.S. was 24.2 percent, and corporate tax revenue totaled 3.0 percent of GDP. In comparison, the combined (State and Federal) top statutory corporate tax rate in the U.S. was 38.9 percent, while corporate tax revenue was only 2.2 percent of GDP.” Even though the U.S. had the highest corporate tax rate, the tax code’s extensive carve-outs, deductions, and credits resulted in a below-average amount of revenue raised from corporate income taxes.

The complexity of the tax code also created a number of unintended consequences. . For instance, the corporate income tax code imposed taxes on the foreign operations of U.S. multinationals when the money was brought back (repatriated) from abroad, not when it was earned. The result was that profits from the investment made domestically generated an immediate tax of 35%, whereas that same activity carried out in a low-tax rate country resulted in significantly higher profits retained by the company. Such firms were therefore encouraged to expand abroad and keep the money outside our shores. The tax code should not incentivize U.S.-headquartered multinationals to locate valuable investment opportunities overseas and build up large cash stockpiles in foreign subsidiaries. Many policymakers on both sides of the aisle were concerned that relatively high tax rates on businesses and perverse loopholes in the code were impairing economic growth. Even the Obama Administration recognized the need for corporate tax reform that lowered marginal tax rates for corporations.