Understanding the Ebb and Flow of Corporate Tax Revenues Post-TCJA
The landscape of corporate taxation underwent a significant transformation with the passage of the 2017 Tax Cuts and Jobs Act (TCJA), which notably reduced the top corporate tax rate from 35% to 21%. This legislative overhaul, the most comprehensive in three decades, not only affected domestic policies but also international corporate tax laws.
In the immediate aftermath of the TCJA, corporate tax revenues witnessed a sharp decline. The Congressional Budget Office (CBO) attributed this downturn to the TCJA’s provisions, particularly the lowered corporate tax rate. The effective tax rate for active corporations plummeted from 26.4% in 2017 to 12.5% in 2018, continuing at reduced levels through 2020. Researchers from the National Bureau of Economic Research (NBER) quantified the impact, estimating a 48% decrease in corporate tax revenues in the first year following the TCJA’s implementation compared to what would have been collected without the changes.
However, a reversal occurred in 2021 as corporate tax revenues surged, surpassing pre-TCJA levels and exceeding CBO’s projections. This rebound was largely fueled by a spike in corporate profits after taxes, which soared to 8.8% of GDP in 2021, marking a historic high since records began in 1929. The reasons behind this profit increase are debated; while some attribute it to economic growth and pandemic-related spending, others credit the TCJA for boosting corporate investment and subsequent economic expansion.
Despite this recovery, NBER researchers suggest that from 2021 to 2023, the TCJA still exerted a negative influence on revenue collection. In 2022 alone, it is estimated that the federal government missed out on 38% of potential corporate tax revenues due to the TCJA’s provisions. Over a ten-year horizon from 2018 to 2027, the TCJA is projected to reduce corporate tax revenues by an estimated 40%.
Looking ahead, several TCJA provisions are set to expire in 2025, including bonus depreciation and certain international income taxes. New legislation such as the Inflation Reduction Act has introduced measures like a 15% corporate minimum tax and increased IRS funding for enhanced compliance. As lawmakers propose extensions and reforms, they face decisions that could shape fiscal sustainability and economic growth, with NBER research highlighting the efficiency of bonus depreciation as an investment incentive over direct rate cuts.
The ongoing debate and legislative adjustments reflect a balancing act between fostering economic vitality and maintaining fiscal responsibility through adequate revenue collection. As various components of the TCJA approach their sunset dates, policymakers are poised to shape the future trajectory of corporate taxation in America.
