RealClearMarkets: A Call to Extend the 2017 Tax Cuts and Jobs Act

As the Democratic National Convention kicks off, the Biden-Harris administration is forced to defend four years of reckless spending and the ensuing inflation crisis.  With no way to justify the prices crushing American families, the DNC platform targets the Trump tax cuts, promising another Democrat term will “make the wealthy and big corporations pay their fair share.”  Vice President Harris has said that she would raise the corporate tax rate; she has previously supported repealing Republicans’ tax cuts altogether.

With many of the Republican-enacted Tax Cuts and Jobs Act (TCJA) provisions set to expire at the end of 2025, and amid Democrats’ continued attacks on many of those provisions, now is a good time to evaluate how the bill really worked.  How did its changes actually affect the tax bills of American families and businesses?  What happens to those tax bills if the tax cuts expire next year?  The answers may surprise you.

TCJA lowered tax rates across the board for all Americans, not just--as opponents of the bill suggest--for the uber wealthy.  The majority of TCJA’s benefits accrued to working middle class families, who on average received a tax cut ranging from $1,500 to $3,000.  Between the bill’s passage in 2017 and 2021, the bottom 50 percent of earners received the largest reduction in average tax rates at 17.3 percent.  The top 5 percent of earners received a 1.7 percent average tax rate reduction, while some in the top 1 percent actually saw their taxes go up.  The TCJA also doubled the standard deduction and the child tax credit, delivered additional help to lower-income workers, and provided tax relief to America’s entrepreneurs and small businesses.

The effects of pro-growth tax reform were almost immediate.  Not only did taxpayers get to keep more of their hard-earned money, but a growing economy helped median household income reach an all-time high of $68,703 in 2019, almost a seven percent increase over the previous year.  The labor market improved, and workers saw wage growth of about $1,400 in annual earnings compared to the pre-TCJA wage trend.  As workers’ earnings increased, more people also participated in the labor market. The unemployment rate fell dramatically to 3.5 percent--the lowest in 50 years.

And what about tax breaks for big corporations?  While the TCJA reduced corporate tax rates from 35 percent to 21 percent, it did so for the vast majority of corporations, large and small.  Businesses paid a price for the lower rate; namely, by expanding the tax base and modifying or eliminating many corporate tax provisions.

Before TCJA, the U.S. had the highest corporate tax rate in the industrialized world.  Lowering the corporate rate to 21 percent put the U.S. at roughly the average rate among developed countries and our trading partners. The TCJA’s corporate tax rate reduction helped make American workers and businesses competitive in the global market. 

A competitive corporate rate, combined with incentivizing businesses to bring foreign earnings back to America, dramatically increased domestic investment and lowered the number of foreign acquisitions of American companies.  Many U.S. businesses that had moved their headquarters overseas came back home.  International tax provisions also prompted companies to bring their valuable intellectual property back to the U.S., further boosting jobs and raising revenue. Since the TCJA’s passage, not a single U.S. company has moved its headquarters abroad for tax purposes, creating more opportunities for Americans. 

Ultimately, the biggest winners of a lower corporate tax rate are middle-class Americans.  Research shows that corporate tax increases get passed on to workers, consumers and retirees, and according to the nonpartisan Joint Committee on Taxation, the majority of that burden hits households making less than $400,000 per year.  Inversely, with a lower corporate tax rate and within the first two years of implementation of TCJA, U.S. companies added 4.7 million new jobs and real median household incomes grew by more than $5,000.  Many groups that historically faced economic disadvantages also benefited from the strong economy.  The post-TCJA unemployment rate for African-Americans, Hispanics and those without a high school degree fell to historic lows.

Under Republican leadership, all Americans reaped the benefits of a flourishing economy, yet Democrats have declared that they want to let TCJA expire.  Its expiration would mean a sharp tax hike for almost every American.  Recent analysis shows that about two-thirds of the TCJA’s expiring individual tax cuts benefit those making less than $400,000 per year, who would see a $2 trillion tax hike.  The average family of four making $75,000 could expect a tax increase of at least $1,500 or more. Their child tax credit will also be cut in half.  All this, while most Americans are paying more than $1,000 more each month compared to January 2021, thanks to persistently-high inflation caused by Democrats’ excessive spending and other misguided policies.  If Democrats let the Trump tax cuts expire, they will be imposing a multi-trillion dollar tax hike on American families, workers and businesses.

Our current tax system can undoubtedly be improved, and building upon the TCJA’s foundation should be the topic of serious discussion as we head into 2025.  But we cannot have this conversation without an honest and empirical assessment of TCJA’s impact.  In this election and in the year ahead we must prevent tax hikes on hardworking families and ensure America remains the most attractive place in the world to do business.

Sen. Mike Crapo (R-ID) is the ranking member of the U.S. Senate Finance Committee. 

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