Incentives and Corporate Tax Cuts

Justin Wolfers’ New York Times article, "How to Think About Corporate Tax Cuts" analyzes the economic effects of President Trump’s corporate tax cuts and references Kent Smetters of Penn Wharton Budget Model. While the tax bill promises to increase the incentive to invest and gives companies more cash, Smetters argues that in the short run giving more money to corporations helps the owners.

In PWBM’s recent analysis of the TCJA, we find that the tax bill increases the national debt by approximately $1.9 trillion to $2.2 trillion over the next 10 years (Table 1). Thus, it is worth paying very close attention to the changes in investment that arise from these tax cuts to see if this bill will actually work to increase wages in the long run.

Table 1: PWBM’s Analysis of TCJA Static Effects on Revenue and Debt Relative to Current Policy

Cumulative Revenue (billions of $) Change in Debt (billions of $)
Static Dynamic Static Dynamic
Years High return to capital Low return to capital High return to capital Low return to capital
2018-2027 -$2,209 -$1,786 -$2,038 $2,387 $1,941 $2,238
2018-2040 -$3,077 -$1,540 -$2,442 $4,005 $2,181 $3,466

Note: The revenue estimates in this table focuses on the official definition of “revenue” and, therefore, does not incorporate changes in outlays. Table 1 reports static analysis both inclusive and exclusive of changes in outlays. Changes in debt include changes in outlays. Consistent with our previous dynamic analysis and the empirical evidence, the projections above assume that the U.S. economy is 40 percent open and 60 percent closed. Specifically, 40 percent of new government debt is purchased by foreigners.