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The 2017 Corporate Tax Rate Cut

Introduction

The Tax Cuts and Jobs Act (TCJA), enacted in December 2017, delivered the largest corporate income tax cut in US history. It replaced the progressive corporate rate schedule facing C-corporations (eight brackets with a top rate of 35 percent) with a flat 21 percent rate, alongside changes to depreciation deductions and the taxation of foreign income.

Kennedy, Dobridge, Landefeld, and Mortenson (2026) studies how firms and their workers responded in the first two years after the reform. The analysis uses IRS corporate Statistics of Income files (Forms 1120 and 1120-S) merged with the universe of worker-level Form W-2 filings, plus Forms 1040 and 1099-K1 for the owners of S corporations. The sample covers 49,235 firms and 231,360 firm-years over tax years 2013–2019.

The paper compares similarly sized C- and S-corporations in the same industry, using an event study specification with firm and industry-size-year fixed effects. Identification comes from the fact that C-corporations received a substantially larger tax cut than otherwise similar pass-through firms due to the reduction in the corporate tax rate. Because a firm’s entity type before TCJA is strongly predictive of the rate change it faced afterwards, and because TCJA’s other business provisions applied to both entity types, the comparison is designed to isolate the effect of the corporate rate cut.

Relative to comparable S-corporations, the paper finds that C-corporations increased their capital stock by 4.6 percent, payroll by 2.0 percent, employment by 1.3 percent, sales by 2.7 percent, pretax operating profits by 2.3 percent, and taxable income by 5.9 percent. Scaling the taxable income response by the net-of-tax rate gives a corporate elasticity of taxable income of 0.70 (SE 0.16). The paper uses this parameter to estimate the MVPF of lowering the corporate tax rate.

MVPF = 1.5

Net Cost

Net cost is expressed per dollar of mechanical corporate tax reduction. The government mechanically forgoes $1.00 of corporate revenue. Because the lower rate induces firms to expand their taxable income, part of that dollar returns to the Treasury as a fiscal externality.

The size of that offset is governed by the corporate elasticity of taxable income and by the tax rate at which the additional income is taxed. Per dollar of mechanical cost,

\text{Net Cost} = 1 - \frac{\tau^*}{1-\tau^*}\,\varepsilon_\pi

where \varepsilon_\pi = 0.70 is the estimated elasticity of corporate taxable income with respect to the net-of-tax rate, and \tau^* is the tax rate on corporate income inclusive of taxes on payouts to shareholders, \tau^* = 1-(1-\tau_c)(1-\tau_p). The paper sets the effective payout tax rate to 2.5 percent, the product of an average payout tax rate of 8.25 percent reported by Cooper et al. (2016) and the finding of Burman, Clausing, and Austin (2017) that 30 percent of corporate income is subject to payout taxes.

TCJA was a large, non-marginal change in the corporate rate, so the calculation is carried out at both the pre-reform and post-reform rates rather than at a single rate. At the pre-TCJA rate of 35 percent, \tau^* = 0.366 and the net cost is $0.60 per mechanical dollar; at the post-TCJA rate of 21 percent, \tau^* = 0.230 and the net cost is $0.79. Averaging the resulting MVPFs gives an implied net cost of approximately $0.68 per dollar of mechanical corporate tax reduction. In other words, roughly 32 cents of every dollar of statutory revenue forgone is recovered through the induced expansion of the corporate tax base.

$0.7 Net Cost
Upper Margin Lower Margin

Willingness to Pay

Willingness to pay is $1.00 per dollar of mechanical corporate tax reduction.

The beneficiaries of the rate cut are the owners of C-corporations, who receive a lower tax rate on profits they were already earning. They are inframarginal with respect to the cut: a dollar of tax relief is worth a dollar to them. The behavioral responses the cut induces (e.g., more investment, more hiring, higher sales and profits) have only second-order effects on the firms’ own welfare.

Who ultimately captures that dollar is a separate question. The paper estimates that, of the total gains, 60 percent accrue to firm owners, 8 percent to executives, and 32 percent to workers in the top decile of the within-firm earnings distribution, with no measurable gain for the bottom 90 percent.

$1.0 WTP
Upper Margin Lower Margin

MVPF Summary

The MVPF is willingness to pay divided by net cost. Per dollar of mechanical corporate tax reduction, this is $1.00 / $0.68 = 1.47. In other words, $1 of foregone corporate tax revenue yielded about $1.47 in aggregate private income.

Equivalently, in the compact form used for a tax rate change,

\text{MVPF} = \left(1 - \frac{\tau^*}{1-\tau^*}\,\varepsilon_\pi\right)^{-1}

Evaluated at the pre-TCJA rate the expression gives 1.68, and at the post-TCJA rate 1.26; since the reform was a large change in the rate rather than a marginal one, the two are averaged, yielding 1.47. Every dollar of corporate tax revenue the government gave up delivered about $1.47 of private income to the firms and workers in the sample.

Accounting for the statistical uncertainty in the elasticity of taxable income (SE 0.16), the 95 percent confidence interval runs from 1.21 to 1.91. The interval is asymmetric because the MVPF is a nonlinear transformation of the elasticity.

1.5 MVPF
1.9 Upper Margin 1.2 Lower Margin

References

Burman, Leonard E., Kimberly A. Clausing, and Lydia Austin (2017). “Is US Corporate Income Double-Taxed?” National Tax Journal, 70(3): 675–706. DOI: https://www.journals.uchicago.edu/doi/10.17310/ntj.2017.3.06

Cooper, Michael, John McClelland, James Pearce, Richard Prisinzano, Joseph Sullivan, Danny Yagan, Owen Zidar, and Eric Zwick (2016). “Business in the United States: Who Owns It, and How Much Tax Do They Pay?” Tax Policy and the Economy, 30(1): 91–128. DOI: https://www.journals.uchicago.edu/doi/full/10.1086/685594

Kennedy, Patrick J., Christine L. Dobridge, Paul Landefeld, and Jacob Mortenson (2026). “Corporate Tax Cuts, Firm Growth, and Workers’ Earnings.” American Economic Review, 116(9): 3380–3422. https://doi.org/10.1257/aer.20240404

 

Policy Features

Category
Taxes
Sub-Category
Firm Taxes/Subsidies
Beneficiary Type(s)
Adults, Firms, Top Income Earners
Country of Implementation
United States
Year of Implementation
2018
Empirical Method
Difference in Differences
Research Type
Primary
Peer Reviewed
Yes
MVPF Publication Link
doi.org/10.1257/aer.20240404