Examining the Impact of the TCJA’s Corporate Tax Rate Cut
The debate over the efficacy of the 2017 Tax Cuts and Jobs Act (TCJA) continues as analysts at Eakinomics pore over the data. A key point of contention remains the reduction of the corporation income tax rate from 35 percent to 21 percent, which does not sunset unlike other provisions of the TCJA. This rate cut has been a lightning rod for criticism, with opponents labeling it as a significant contributor to the fiscal challenges of the United States. Conversely, some proponents assert that the reduction has “paid for itself.”
An analysis of the data reveals a nuanced picture. In 2018, following the rate cut, there was a noticeable decline in corporate tax revenue. However, by 2022 and 2023, actual revenues have surpassed the Congressional Budget Office’s (CBO) projections, despite the lower tax rate. This suggests that a 35 percent rate is not necessary to achieve the revenue levels of 2017. Yet, from 2018 to 2021, revenues fell short of projections, with a cumulative deficit of $353 billion, partly due to the economic impact of the COVID-19 pandemic.
To reconcile this shortfall, corporate revenues would need to grow at an average annual rate of 8 percent from 2023 to 2027, which appears improbable in an economy with nominal income growth trending at 4 percent or below. This is in stark contrast to the CBO’s assumed growth rate of 3.6 percent.
Ultimately, Eakinomics views the corporate rate cut as neither a complete failure nor a panacea. It is, instead, an element of the broader trade-offs inherent in genuine tax reform. The benefits derived from reducing tax-base distortions—such as those affecting location, investment, and financing decisions in the corporate sector—are considered sufficient to counterbalance the short-term revenue losses. As policymakers look ahead to the sunset of many TCJA provisions at the end of 2025, these trade-offs will undoubtedly be at the forefront of discussions on tax policy.
