## wpiea2019120 - 5.2 percentage points on a Q4/Q4 basis. The actual increases in GDP and investment growth

## Source details

**Canonical URL:** [wpiea2019120 - 5.2 percentage points on a Q4/Q4 basis. The actual increases in GDP and investment growth](https://www.imf.org/-/media/files/publications/wp/2019/wpiea2019120.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/wp/2019/wpiea2019120.pdf.md)
- [Structured JSON version](/-/media/files/publications/wp/2019/wpiea2019120.pdf.json)

---

### Key findings on GDP and investment outcomes
- Predicted post‑TCJA increases in GDP and investment were 5.2 percentage points on a Q4/Q4 basis (benchmark from prior literature/estimates referenced).
- Actual increases since the passage of the TCJA compared with pre‑TCJA forecasts:
  - GDP: 0.7 percentage points.
  - Investment growth: 3.5 percentage points.
- U.S. real private fixed investment in 2018 exceeded pre‑TCJA expectations by 2.2 percent.
- Business investment (non‑residential fixed investment) growth in 2018:
  - National Income and Product Accounts measure: 7.0 percent (Q4/Q4).
  - Alternative measure (Distribution of GDP / Financial Accounts aggregation): 7.4 percent (Q4/Q4).
- For 2017, business investment growth:
  - NIPA measure: 6.3 percent (Q4/Q4).
  - Alternative measure: 6.4 percent (Q4/Q4).

### Factors investigated that may have dampened the TCJA impact
- Two main dampeners analyzed:
  - Increased economic policy uncertainty.
  - Greater corporate market power (higher markups).

- Policy uncertainty:
  - Policy uncertainty indices rose since 2017 amid growing uncertainty regarding trade and other policies.
  - Quantified impact: policy uncertainty played a role in subduing investment growth in 2018.
  - VAR estimate (1990Q1–2018Q2): cumulative reduction in investment due to increased EPU during 2018 is about 0.4 percent.
  - Altig and others (2019) estimate trade policy uncertainty reduced capital investment in 2018 by 1.2 percent; manufacturing capital investment estimate: -4.2 percent.

- Market power:
  - Díez, Leigh, and Tambunlertchai (2018) document a sales-weighted average increase in corporate markups of 42 percent for the United States from 1980 to 2016.
  - Theoretical result: higher markups reduce steady-state investment and lower responsiveness of investment to a given tax cut.
  - GIMF simulations: a corporate tax cut produces a considerably smaller response in investment, output, employment, and real wages when corporate markups are high.
  - Firm-level empirical results (17 advanced economies): tax changes have significantly smaller impacts on investment and employment in firms with higher markups.
  - S&P500 2018 evidence: firms with higher estimated markups increased investment and investment growth by less in 2018 than firms pricing closer to marginal cost.

### Empirical assessment of U.S. private investment since 2017
- Method:
  - Compare 2018 outturn in real private fixed investment with Fall 2017 IMF World Economic Outlook (WEO) forecasts (compiled using information through September 18, 2017) that assumed unchanged U.S. fiscal policies.
  - Verified forecasts from as far back as 2015 show no systematic change.

- Empirical observations:
  - Real private fixed investment already started outperforming forecasts in 2017Q4.
  - 2018 outperformance led by non‑residential (business) investment: overperformed pre‑TCJA forecasts by 4.7 percent.
  - On a Q4/Q4 basis, business investment growth in 2018 exceeded anticipations by 3.5 percentage points.
  - Residential investment fell below the pre‑TCJA forecast in 2018.
  - Business investment growth was broad‑based: equipment and software and IP saw the highest growth and accounted for most of the deviation.
  - Structures investment started strongly in 2018 but tapered; structures account for around 20 percent of total business investment.

### Role of the oil sector
- Pickup in investment in 2018 coincided with higher oil prices and a pickup in domestic oil production.
- Oil sector accounts for virtually all of the growth in the structures category in 2017 and 2018.
- Oil sector contributes little to non‑structures (equipment, software, and IP) investment.
- Conclusion: oil sector’s role in driving overall business investment growth in 2018 was relatively small.
- Analysis based on National Income and Product Accounts statistics (includes mining activity).

### Accelerator model: how much reflects aggregate demand?
- Approach:
  - Forward‑looking accelerator model linking investment to expectations of future product demand.
  - Empirical specification uses real‑time private‑sector forecasts (Consensus Economics).
  - Estimated equation:
    - (1) I_t = α + β(L) E_t ΔY_{t+h} + δ K_{t−1} + ε_t
    - I_t: real business investment in IP and equipment and software categories.
    - E_t ΔY_{t+h}: 4‑quarter‑ahead Consensus Economics forecast of non‑investment output growth (h = 4).
  - Sample: 1983Q4‑2016Q4; out‑of‑sample predictions for 2017Q1‑2018Q4.
  - Structures investment excluded to avoid oil‑price‑induced volatility.

- Results:
  - Accelerator model provides a close fit with actual business investment.
  - Little unexplained strength in investment since 2017 after accounting for expected aggregate demand.
  - Implies lower user cost of capital from reduced corporate tax rate and full expensing played a relatively minor role.
  - Alternative interpretation: a positive tax effect could have been offset by contemporaneous developments (e.g., increased policy uncertainty, higher markups).

### Survey evidence on drivers of investment
- NFIB Small Business Surveys (over 2,000 firms with fewer than 100 employees):
  - Net percentage of firms expecting higher real sales over the next six months started to climb in 2017.
- NABE Business Conditions Survey:
  - 11 percent of surveyed firms attributed acceleration of their investment to the TCJA.
  - 4 percent reported redirecting investment or hiring to the United States as a result of the TCJA.

### Sectoral responses and use of incremental cash
- Sectoral responses:
  - Goods producing sector more likely to have accelerated or redirected business to the U.S.; service sector least likely.
  - Hanlon, Hoopes, and Slemrod (2018): 22 percent of S&P500 firms mentioned planned investment increases linked to the TCJA in 2018Q1.
  - NFIB (Feb–Apr 2018): 24 percent of small business owners planned to use TCJA savings to increase business investments.
  - NFIB detail: 51 percent expected to pay less in federal income tax in 2018; of those, 47 percent planned to increase business investment with tax savings.

- Use of incremental cash:
  - U.S. Treasury data: corporate tax revenue in FY2018 fell by US$92 billion — a 31 percent drop.
  - S&P500 firms analysis since end‑2017: about 20 percent of incremental cash outflow post‑TCJA went towards capital expenditure or R&D; remainder to share buybacks, dividends, and other activities.
  - Interpretation: limited direct capital formation from TCJA cash; possible indirect reallocations across the economy.

### Historical-predicted vs. actual macro outcomes
- Historical predictions (Mertens (2018) synthesis and scaled Mertens and Ravn (2013) ratios):
  - Predicted TCJA impact on real GDP growth in 2018: between 0.9 and 1.8 percentage points (Q4/Q4).
  - Predicted rise in business investment: between 3.4 and 7.2 percentage points (Q4/Q4).
- Actual 2018 outcomes vs pre‑TCJA forecasts:
  - Real GDP: +0.7 percentage points.
  - Business investment: +3.5 percentage points.
- CEA (2019) calculated actual TCJA impact on GDP at 1.4 percentage points (note in source explains implications for non‑TCJA baseline growth for 2018).

### Decomposition: predicted vs actual impact of TCJA on business investment growth (2018)
- Predicted impact (average of studies in Section III and including BBA boost): increase in investment by 5.7 percentage points compared with pre‑TCJA baseline.
  - BBA assumption: effect on GDP of 0.2 percent based on assumed government expenditure multiplier of one‑half; translated into investment using literature estimates.
- Actual impact: business investment growth outturn in 2018 minus Fall 2017 IMF WEO forecast = 3.5 percentage points.
- Gap: predicted minus actual = 2.2 percentage points (5.7 – 3.5).
- Contributions to the 2.2 percentage point gap:
  - Rise in corporate markups (difference between 2016 markups and postwar average): 1.3 percentage points.
  - Policy uncertainty (Section IV.A estimate): 0.4 percentage point.
  - Unexplained residual: 0.5 percentage point.

### Role of market power: theory, simulations, and firm-level evidence
- Theoretical expressions:
  - Corporate tax revenue-to-GDP identity: T_CIT / Y = τ_CIT [ (R_K − δ) K/Y + (1 − 1/μ ) ] where μ is markup.
  - Distortion: R_K − δ = r(1 − τ_CIT).
  - Steady-state investment share: I/Y = δ α / (μ R_K).
  - Implication: higher μ implies lower steady-state investment and smaller responsiveness to tax cuts.

- GIMF simulations:
  - Corporate tax cut equivalent to 1 percent of GDP simulated in three markup states:
    - Low markups: 10 percent (approximate 1980 level).
    - Medium markups: 25 percent (approximate 1990 level).
    - High markups: 60 percent (approximate 2016 level).
  - Result: tax cut induces smaller responses in GDP, investment, wages, and employment when markups are higher.
  - 10‑year investment increase in low‑markup world (1980 level) is more than double that in high‑markup world (2016 level).

- Firm-level empirical evidence (OECD panel, 17 advanced economies):
  - Estimated equation: Y_ijkt = β ΔF_kt + γ (ΔF_kt × ln μ_ijkt) + controls + fixed effects.
  - Main findings:
    - Tax‑based fiscal expansion raises firm-level investment and employment.
    - Higher markups dampen the effect of fiscal expansions on investment and employment.
  - Economic significance:
    - A rise in corporate markups of 40 percent (roughly U.S. rise 1980–2016) reduces investment response to a 1 percent of GDP tax‑based fiscal expansion by 45 percent.
    - A rise in market power of 28 percent (difference between U.S. 2016 markups and post‑war U.S. average) reduces the investment response by about 37 percent.
  - Table 2 selected coefficients (investment rate regressions, clustered SEs in parentheses):
    - Fiscal shock: 1.218*** (0.108) in column (1); 1.487*** (0.126) in column (2).
    - Fiscal shock × markup: -1.374*** (0.389) in column (1); -1.117*** (0.420) in column (2); -1.406*** (0.416) in column (3).
    - Observations: Investment rate regressions = 204,251; Employment growth regressions = 190,207.
    - R-squared (investment rate): 0.074 (col 1), 0.093 (col 2), 0.114 (col 3).

- U.S. S&P500 2018 cross-section evidence (Table 3):
  - Equation: Y_ij = β ln μ_ij + industry fixed effects + ε_ij.
  - Coefficient estimates:
    - Markup (log) in 2016 on CapEx Growth in 2018: -0.057** (0.026).
    - Markup (log) in 2016 on Δ CapEx Growth in 2018: -0.147*** (0.050).
  - Economic magnitudes:
    - A 50 percent increase in markups reduces firm-level investment growth by 2.9 percentage points.
    - In change‑in‑growth specification, a 50 percent increase in markups reduces change in capital expenditure growth by 7.4 percentage points.
  - Observations: 344 (CapEx Growth), 342 (Δ CapEx Growth).
  - R-squared: 0.098 (CapEx Growth), 0.056 (Δ CapEx Growth).

### Markup levels and aggregate implications
- Postwar average markup assumed equal to average level in the 1980s: postwar average markup = 1.25 (25 percent).
- Estimated markup in 2016 = 1.60 (60 percent).
- Using coefficient estimates in Table 2 (column 1):
  - Rise in markups from 1.25 to 1.60 reduces investment rate response to a 1 percent of GDP tax‑based fiscal expansion from 0.92 percentage point to 0.58 percentage point, implying a reduction in the response of 37 percent ((0.58/0.92) - 1).
- In 2016, U.S. firms in the sample have sales equivalent to 79 percent of U.S. GDP.

### Other factors and robustness
- Other potential dampeners:
  - Complexity and incomplete regulations of the new tax regime, especially international provisions increasing tax liabilities for multinational companies.
  - Timing: passage of TCJA during an economic expansion—fiscal policy effects can be smaller during expansions (Auerbach and Gorodnichenko 2012; dissenting view Owyang, Ramey, and Zubairy 2013).
  - Investment adjustment costs, regulatory issuance, code clarity issues.

- Robustness checks (S&P500 estimations):
  - Controlled for effective tax rate in 2016 (income tax paid as percent of pre‑tax income): results similar; coefficient on initial tax rate statistically indistinguishable from zero.
  - Controlled for investment growth and change in investment growth in 2016: results similar.
  - Repeated estimation excluding each major industry: similar results, not driven by any single industry.

### Budgetary impact summary (Joint Committee on Taxation static estimates, percent of pre‑TCJA projected GDP)
- Total: 2018 = -0.7; 2019 = -1.4; 2020 = -1.2; 2027 = 0.1
- Individual Tax Reform: 2018 = -0.4; 2019 = -0.9; 2020 = -0.8; 2027 = 0.3
- Pass-through tax cut: 2018 = -0.1; 2019 = -0.2; 2020 = -0.2; 2027 = 0.0
- Other (individual): 2018 = -0.2; 2019 = -0.7; 2020 = -0.6; 2027 = 0.3
- Business Tax Reform: 2018 = -0.6; 2019 = -0.6; 2020 = -0.5; 2027 = -0.2
- Reduction in CIT rate (35% to 21%): 2018 = -0.5; 2019 = -0.6; 2020 = -0.6; 2027 = -0.6
- Expensing of capital spending: 2018 = -0.2; 2019 = -0.2; 2020 = -0.1; 2027 = 0.0
- Other (business): 2018 = 0.0; 2019 = 0.1; 2020 = 0.2; 2027 = 0.3
- International Tax Reform: 2018 = 0.3; 2019 = 0.2; 2020 = 0.1; 2027 = 0.0
- Memorandum — Pass-through and CIT rate cut: 2018 = -0.6; 2019 = -0.8; 2020 = -0.8; 2027 = -0.6

### Key conclusions and policy implications
- In the year following TCJA passage, U.S. business investment grew strongly relative to pre‑TCJA forecasts and outperformed investment growth in other major advanced economies—largely supported by strong aggregate demand and simultaneous government spending stimulus from the BBA.
- Market power played a significant role in shaping the corporate investment response to the TCJA; rising corporate market power can explain a large part of the shortfall relative to historical predictions.
- Policy implications:
  - In an environment of rising market power, corporate tax cuts become less effective at raising investment.
  - Reducing economic policy uncertainty could result in further growth in business investment.

*Source: IMF working paper content (wpiea2019120).*

### 5.2 percentage points on a Q4/Q4 basis. The actual increases in GDP and investment growth

### wpiea2019120 - 5.2 percentage points on a Q4/Q4 basis. The actual increases in GDP and investment growth

### Key findings on GDP and investment outcomes
- Predicted post‑TCJA increases in GDP and investment were 5.2 percentage points on a Q4/Q4 basis (as a benchmark from prior literature/estimates referenced).
- The actual increases in GDP and investment growth since the passage of the TCJA compared with pre‑TCJA forecasts have been below these predictions, at 0.7 and 3.5 percentage points, respectively.
- U.S. real private fixed investment in 2018 exceeded pre‑TCJA expectations by 2.2 percent.
- Business investment (non‑residential fixed investment) growth in 2018 was 7.0 percent on a Q4/Q4 basis (National Income and Product Accounts measure).
- Alternative measure of real business investment growth in 2018 (sum of private nonresidential fixed investment by (a) nonfinancial corporate business; (b) nonfinancial noncorporate business, and (c) financial institutions, based on the Distribution of Gross Domestic Product data from the Federal Reserve’s Financial Accounts of the United States) was 7.4 percent (Q4/Q4).
- For 2017, business investment growth rates using the above two measures are, respectively, 6.3 and 6.4 percent on a Q4/Q4 basis.

### Factors investigated that may have dampened the TCJA impact
- Two factors analyzed in Section IV as possible dampeners relative to previous postwar tax‑cut episodes:
  - Increased economic policy uncertainty.
  - Greater corporate market power (higher markups).

- Policy uncertainty:
  - A large literature documents a negative relation between policy uncertainty and business investment (references include Bernanke (1983); Bloom, Bond, and Van Reenen (2007); Handley and Limão (2015); Baker, Bloom, and Davis (2016)).
  - Policy uncertainty indices have risen since 2017 in the context of growing uncertainty regarding trade and other policies.
  - The authors quantify the impact of the rise in policy uncertainty indices since 2017 and find that policy uncertainty has played a role in subduing investment growth in 2018.

- Market power:
  - A growing literature documents a widespread rise in market power in advanced economies over the past several decades (De Loecker and Eeckhout (2017); Díez, Leigh, and Tambunlertchai (2018); De Loecker and Eeckhout (2018); IMF (2019)).
  - The paper claims a novel contribution by investigating the link between the rise in market power and the potency of tax policy changes.
  - IMF GIMF general equilibrium model simulations show that a cut to the corporate tax rate theoretically produces a considerably smaller response in investment, output, employment, and real wages when corporate markups are high.
  - Firm‑level empirical analysis for 17 advanced economies, using a narrative dataset of fiscal shocks (Guajardo, Leigh, and Pescatori 2014) and estimates of firm‑level markups (Díez, Leigh, and Tambunlertchai 2018), finds that the impact of tax changes on investment and employment is significantly smaller in firms with higher markups.
  - Similar results hold when looking only at 2018 data for U.S. publicly listed companies: firms with higher estimated markups increased investment (and investment growth) by less in 2018 than firms pricing closer to marginal cost.

### How has U.S. private investment performed since 2017?
- Method:
  - Compare 2018 outturn in real private fixed investment with forecasts from the Fall 2017 vintage of the IMF’s World Economic Outlook (WEO) database, which were based on the assumption of unchanged U.S. fiscal policies.
  - Verified that forecasts for 2018 made as far back as 2015 show no systematic change (Figure 1 referenced).
  - Fall 2017 WEO was compiled on the basis of information available through September 18, 2017.

- Empirical observations:
  - Real private fixed investment in the United States already started outperforming forecasts in 2017Q4.
  - The strong 2018 performance was led by non‑residential (business) investment, which overperformed pre‑TCJA forecasts by 4.7 percent.
  - On a Q4/Q4 basis, business investment growth in 2018 was greater than had been anticipated by 3.5 percentage points.
  - Residential investment fell below the pre‑TCJA forecast in 2018.
  - Growth in business (non‑residential) investment was broad‑based across categories; equipment and software and IP saw the highest growth and accounted for most of the business investment deviation from the pre‑TCJA forecast.
  - Investment in structures started the year strongly, but then tapered and overall contributed little to the growth in business investment in 2018; structures account for around 20 percent of total business investment.

### Role of the oil sector
- The pickup in investment in 2018 coincided with higher oil prices and a pickup in domestic oil production.
- The oil sector accounts for virtually all of the growth in the structures category of investment in 2017 and 2018.
- The oil sector contributes little to non‑structures (equipment, software, and IP) investment.
- Conclusion: the oil sector’s role in driving overall business investment growth in 2018 was relatively small.
- Analysis is based on National Income and Product Accounts statistics, which includes mining activity.

### How much of higher investment reflects aggregate demand? (Accelerator model)
- Approach:
  - Use a standard forward‑looking accelerator model linking investment to expectations of future product demand.
  - Empirical specification uses real‑time private‑sector forecasts (Consensus Economics) to capture expected demand growth.
  - Equation estimated:
    - (1) I_t = α + β(L) E_t ΔY_{t+h} + δ K_{t−1} + ε_t
    - I_t denotes real business investment in IP and equipment and software categories.
    - E_t ΔY_{t+h} denotes the forecast of growth over the next h quarters, with h = 4 (4‑quarter‑ahead Consensus Economics forecast of non‑investment output growth).
  - Sample spans 1983Q4‑2016Q4; out‑of‑sample predictions made for 2017Q1‑2018Q4.
  - Structures investment excluded from estimation to avoid oil‑price‑induced volatility.

- Results:
  - The accelerator model provides a close fit with actual business investment.
  - Little unexplained strength in investment since 2017 after accounting for expected aggregate demand.
  - Suggests that factors beyond expectations of aggregate demand—such as the lower user cost of capital associated with the reduced corporate tax rate and full capital expensing—have played a relatively minor role in stimulating investment since 2017.
  - Alternatively, the tax reform could have had a greater positive effect that was offset by other contemporaneous developments (e.g., increased policy uncertainty, higher markups).

### Survey evidence on drivers of investment
- NFIB Small Business Surveys (over 2,000 firms with fewer than 100 employees) show the net percentage of firms expecting higher real sales over the next six months started to climb in 2017, signaling rising demand conditions.
- NABE Business Conditions Survey: only 11 percent of surveyed firms attributed the acceleration of their investment to the TCJA; only 4 percent reported redirecting investment or hiring to the United States as a result of the TCJA.

*Source: IMF working paper content (wpiea2019120).*

### 7. The goods producing sector was the more likely to have accelerated or redirected business to

### 7. The goods producing sector was the more likely to have accelerated or redirected business to 

### Sectoral responses to the TCJA
- The goods producing sector was more likely to have accelerated or redirected business to the U.S.; the service sector was the least likely to do either.
- Hanlon, Hoopes, and Slemrod (2018) analysis of earnings conference calls of S&P500 companies in 2018Q1: only 22 percent of firms mentioned planned increases in investment linked to the TCJA (retail sector most likely).
- NFIB survey (fielded February–April 2018): 24 percent of small business owners planned to use TCJA tax savings to increase business investments.
- NFIB additional detail: 51 percent of small business owners expected to pay less in federal income tax in 2018; of those, 47 percent reported planning to increase business investment with their tax savings.

### Use of incremental cash from the TCJA
- U.S. Treasury data: corporate tax revenue in FY2018 fell by US$92 billion—a 31 percent drop.
- Analysis of S&P500 firms since end-2017: only about 20 percent of the incremental cash outflow post-TCJA went towards capital expenditure or R&D; the remainder went towards share buybacks, dividends, and other activities.
- Interpretation: limited direct capital formation from TCJA cash; possible indirect effects as cash is reallocated across the economy.

### Historical-predicted vs. actual macro outcomes
- Mertens (2018) synthesis of postwar studies predicts TCJA impact on real GDP growth in 2018 of between 0.9 and 1.8 percentage points on a Q4/Q4 basis.
- Predicted rise in business investment (scaled from Mertens and Ravn (2013) ratios): between 3.4 and 7.2 percentage points on a Q4/Q4 basis.
- Actual increases in 2018 compared with pre-TCJA forecasts: real GDP +0.7 percentage points; business investment +3.5 percentage points—both at the low end of the historical-based predicted impacts.
- CEA (2019) calculated actual TCJA impact on GDP at 1.4 percentage points; the note explains implications for non-TCJA baseline growth for 2018.

### Potential explanations for muted investment response
- Two focal hypotheses investigated:
  - Heightened economic policy uncertainty delaying investment.
  - Rise in market power (higher markups) reducing sensitivity of investment to tax cuts.
- Other possible factors noted: investment adjustment costs, ongoing regulatory issuance and code clarity issues.

### Policy uncertainty: evidence and quantification
- Economic theory: irreversible investment and uncertainty generate option value of waiting (Bernanke 1983); uncertainty can also work through credit spreads and household spending cuts.
- EPU and TPU indices (Baker, Bloom, and Davis 2016) climbed substantially during 2018 as trade disagreements rose.
- VAR on quarterly data 1990Q1–2018Q2: estimated cumulative reduction in investment due to increased EPU during 2018 is about 0.4 percent.
- Altig and others (2019) estimate trade policy uncertainty reduced capital investment in 2018 by 1.2 percent (Federal Reserve Bank of Atlanta SBU); manufacturing capital investment estimate: -4.2 percent.

### Role of market power: theory and GIMF model simulations
- Empirical findings indicate rising markups: Díez, Leigh, and Tambunlertchai (2018) document a sales-weighted average increase in corporate markups of 42 percent for the United States from 1980 to 2016.
- Higher markups associated with rising firm-level profitability and industry concentration; evidence argues this is not driven by recouping fixed costs of intangible investments.
- Theoretical links:
  - Corporate tax revenue-to-GDP identity: T_CIT / Y = τ_CIT [ (R_K − δ) K/Y + (1 − 1/μ ) ] where μ is markup.
  - Distortion expression: R_K − δ = r(1 − τ_CIT).
  - Steady-state investment share: I/Y = δ α / (μ R_K).
  - Higher μ implies lower steady-state investment and reduces responsiveness of investment to a given tax cut because (1 − 1/μ) raises tax-to-GDP and thus a given revenue-equivalent tax cut implies a smaller effective tax rate change.
- GIMF simulations of a corporate tax cut equivalent to 1 percent of GDP in three markup states:
  - Low markups: 10 percent (approximate 1980 level).
  - Medium markups: 25 percent (approximate 1990 level).
  - High markups: 60 percent (approximate 2016 level).
- Simulation result: tax cut induces smaller responses in GDP, investment, wages, and employment when markups are higher; the 10-year investment increase in the low-markup world (1980 level) is more than double that in the high-markup world (2016 level).

### Role of market power: firm-level empirical evidence (OECD panel)
- Data and identification:
  - Firm-level investment and employment: Thomson Reuters Worldscope (sample from 1980 for advanced economies).
  - Firm-level markups: Díez, Leigh, and Tambunlertchai (2018) estimates.
  - Fiscal shocks: narrative dataset of Guajardo, Leigh, and Pescatori (2014) covering 1978–2009 for 17 OECD countries; focus on tax-based fiscal shocks.
- Estimated equation (investment rate as dependent variable):
  - Y_ijkt = β ΔF_kt + γ (ΔF_kt × ln μ_ijkt) + Σ_x θ_x x_ijkt + Σ_i α_i + Σ_t θ_t + ε_ijkt
  - Y_ijkt: firm i investment rate in sector j, country k, year t.
  - ΔF_kt: fiscal shock.
  - μ_ijkt: firm markup.
  - Controls include firm and time fixed effects; baseline includes markup among controls.
- Findings:
  - Tax-based fiscal expansion raises firm-level investment and employment.
  - Higher markups dampen the effect of fiscal expansions on investment and employment.
  - Robustness: effect persists with sector-time dummies.
- Economic significance:
  - A rise in corporate markups of 40 percent (roughly the U.S. rise 1980–2016) reduces the investment response to a 1 percent of GDP tax-based fiscal expansion by 45 percent.
  - A rise in market power of 28 percent (difference between U.S. 2016 markups and post-war U.S. average) reduces the investment response by about 37 percent.
- Conclusion: estimated weakening in impact of tax cuts with rising market power is broadly consistent with GIMF simulations.

### Evidence for U.S. firms in 2018 (S&P500 analysis framework)
- For direct linkage to TCJA effects, an equation estimated for 2018 firm-level capital expenditure growth:
  - Y_ij = β ln μ_ij + Σ_j α_j + ε_ij
  - Y_ij: capital expenditure growth or change in capital expenditure growth for company i in industry j.
  - μ_ij: (log) markup of company i.
- (Estimation approach described; detailed results not included in the supplied text excerpt.)

*Source: IMF staff analysis as presented in the supplied chapter excerpt.*

### 2016. Estimates of the company markups come, as before, from Díez, Leigh, and

### wpiea2019120 - 2016. Estimates of the company markups come, as before, from Díez, Leigh, and

### Markups, baseline levels, and aggregate implications
- Postwar average markup assumed equal to average level in the 1980s, yielding a postwar average markup of 1.25 (25 percent).
- Estimated markup in 2016 is 1.60 (60 percent).
- Using coefficient estimates in Table 2 (column 1), a rise in markups from the postwar average level (1.25) to the 2016 level (1.60) reduces the investment rate response to a 1 percent of GDP tax-based fiscal expansion from 0.92 percentage point to 0.58 percentage point, implying a reduction in the response of 37 percent ((0.58/0.92) - 1).
- For 2016, the U.S. firms in the sample have sales equivalent to 79 percent of U.S. GDP.

### Firm-level evidence on investment responses after the TCJA
- Companies with higher markups in 2016 increased investment by less in 2018.
- Estimated effect: a 50 percent increase in markups reduces firm-level investment growth by 2.9 percentage points.
- Change-in-growth specification: a 50 percent increase in markups reduces the change in capital expenditure growth by an estimated 7.4 percentage points.
- Conclusion: greater market power in 2016 is associated with a weaker investment response in 2018.

### Robustness checks performed
- Controlled for the effective tax rate for firm i in 2016 (income tax paid in percent of pre-tax income); results very similar to those in Table 3 and the coefficient on the initial tax rate is statistically indistinguishable from zero.
- Controlled for investment growth and the change in investment growth in 2016 to address potential catch-up dynamics; results remain very similar to those in Table 3.
- Repeated estimation excluding each major industry from the sample; similar results found, indicating results are not driven by any single industry.

### Decomposition: predicted vs actual impact of TCJA on business investment growth (2018)
- Predicted impact (based on the average of studies in Section III and including the additional boost from the BBA): an increase in investment by 5.7 percentage points compared with the pre-TCJA baseline.
  - BBA assumption: effect on GDP of 0.2 percent based on an assumed government expenditure multiplier of one-half; translated into investment using literature estimates of the investment–output link.
- Actual impact: business investment growth outturn in 2018 minus the Fall 2017 IMF WEO forecast = 3.5 percentage points.
- Gap: predicted minus actual = 2.2 percentage points (5.7 – 3.5).
- Contributions to the 2.2 percentage point gap:
  - Rise in corporate markups (difference between 2016 markups and postwar average): accounts for 1.3 percentage points of the gap.
  - Policy uncertainty (Section IV.A estimate): accounts for 0.4 percentage point of the gap.
  - Unexplained residual: 0.5 percentage point.

### Other factors potentially affecting investment response
- Complexity and incomplete regulations of the new tax regime, especially international provisions, may have muted firm responses; international provisions increase tax liabilities for multinational companies and may offset benefits from lower statutory rate and full expensing.
- Evidence: Hanlon, Hoopes, and Slemrod (2018) find multinational firms were less likely to make ex ante announcements about planned increases in investment.
- Timing: passage of the TCJA occurred during an economic expansion; several empirical studies suggest fiscal policy effects can be smaller during expansions (Auerbach and Gorodnichenko 2012; dissenting view Owyang, Ramey, and Zubairy 2013).
- Net assessment: once market power and policy uncertainty are accounted for, other factors appear to have played a limited role or may have offset one another.

### Key conclusions and policy implications
- In the year following TCJA passage, U.S. business investment grew strongly relative to pre-TCJA forecasts and outperformed investment growth in other major advanced economies—largely supported by strong aggregate demand and simultaneous government spending stimulus from the BBA.
- Market power played a significant role in shaping the corporate investment response to the TCJA; rising corporate market power can explain a large part of the observed shortfall relative to historical predictions.
- Policy implications highlighted by the analysis:
  - In an environment of rising market power, corporate tax cuts become less effective at raising investment.
  - Reducing economic policy uncertainty could result in further growth in business investment.

*Source: IMF working paper content (wpiea2019120).*

### Introduction to the Tax Cuts and Jobs Act: Part 1.”

### Introduction to the Tax Cuts and Jobs Act: Part 1.

### Forecasts and Investment Outcomes
- Evolution of forecasts of growth for 2018: Figure shows vintages of IMF staff and Consensus Economics forecasts from Spring 2015 to Fall 2017 for Real GDP and Real Business Investment.
- Real Private Fixed Investment: United States and Other Advanced Economies indexed to 2015Q4 = 100 (vertical line at 2017Q4). Figures present country indices (USA, DEU, FRA, GBR, ITA, JPN) across 2015–2019.
- U.S. Real Private Fixed Investment (Index; 2015Q4 = 100) decomposed into:
  - Private Investment
  - Residential
  - Business
  - Equipment
  - IP
  - Structures
  (Indices plotted 2015–2019 with vertical line at 2017Q4.)
- Business Investment level: deviations from Fall 2017 cumulative growth forecast (percentage point contributions):
  - Series show Equipment, IP, Structures contributions and total deviation (solid line) for 2017–2019 with scale from -1.0 to 4.0 percentage points.

### Sectoral Composition and Accelerator Model
- Business Investment: Oil vs. Non-oil Sector — data include mining activity for the oil sector (National Income and Product Accounts and author calculations).
- Accelerator Model: Real Business Investment (log index):
  - Model predictions for equipment and IP obtained by multiplying predicted investment rate by lagged capital stock.
  - Charted actual vs. accelerator model vs. Fall 2017 forecast for 2017–2019 (log index values around 7.6–7.75).

### Firm Survey Responses and Cash Use
- Firm survey responses (National Association of Business Economics’ Business Conditions Survey):
  - Accelerated investment as a result of TCJA? (Percent responding “yes”) reported by sector: All, Goods, TUIC, FIRE, Services across 2018Q1–2018Q4 (percent scale 0–100).
  - Redirected hiring/investment to US due to TCJA? (Percent responding “yes”) same sector breakdown and quarters (percent scale 0–100).
  - Note: TUIC = Transportation, Utilities, Information, and Communication; FIRE = Finance, Insurance and Real Estate.
- Use of incremental cash since TCJA (Percent of total) from S&P Global database and author calculations (figure presented).

### Impact of TCJA on 2018 Growth: Empirical Comparisons
- Impact of Tax Cuts and Jobs Act on 2018 Growth: Actual vs. Predicted Based on Existing Empirical Estimates (Percent; Q4/Q4):
  - Sources: Mertens (2018) and IMF staff forecasts. Consensus denotes Consensus Economics. SPF denotes Survey of Professional Forecasters.
  - Note: Actual impact denotes real outcome for GDP and business investment growth compared to IMF staff fall 2017 forecast conditional on unchanged U.S. fiscal policy.
  - Figure plots estimates from: Mertens and Ravn (2013), Mertens and Ravn (2014), Romer and Romer (2010), Mertens and Ravn (2012), Favero and Giavazzi (2012), Blanchard and Perotti (2002), Caldara and Kamps (2017), and “Actual” for GDP and Business Investment (scales differ: GDP 0.0–2.0 percent, Business Investment 0.0–8.0 percent).

### Policy Uncertainty and Investment
- Trade Policy Uncertainty (TPU) and Economic Policy Uncertainty (EPU) indexes (Baker, Bloom, and Davis):
  - EPU is composite of news-based policy uncertainty (10 newspapers), tax code expiration data, and economic forecaster disagreement.
  - TPU is a news-based index (2,000+ newspapers) satisfying economic policy uncertainty terms plus trade-related policy terms.
- Estimated effect of Economic Policy Uncertainty on Investment in 2018:
  - Figure shows cumulative impact of increased economic policy uncertainty on real business investment estimated from a vector autoregression model.

### Market Power, Markups, and General Equilibrium Simulations
- Evolution of estimated markups for the United States (sales-weighted mean for all publicly listed firms) from Díez, Leigh, and Tambunlertchai (2018) plotted over 1980–2020 with markup scale 1.1–1.6.
- Macroeconomic impact of a 1 percent of GDP corporate income tax cut (Percent; Year t = 10) from GIMF simulations with calibration of markups based on Díez, Leigh, and Tambunlertchai (2018):
  - Variables reported: Real GDP, Real investment, Real wage, Employment.
  - Scenarios by markup level: Low markups (1980 level), Medium markups (1990 level), High markups (2016 level).
  - Chart scale 0.0–4.5 percent.

- Estimated effect of tax-based fiscal expansion of 1 percent of GDP vs. markup:
  - Figure with dashes indicating 90 percent confidence interval.
  - Outcome variables shown include Investment rate and Employment (percentage points) across markup values (.5 11 .522 .5 displayed on axis labels as in source).

### Predicted vs. Actual 2018 Business Investment Growth
- Predicted vs. Actual Growth of Business Investment in 2018 (percentage points; deviation from pre-TCJA baseline):
  - Components described in note:
    - Predicted impact of TCJA: average of studies described in text.
    - Predicted impact of Balance Budget Act (BBA): estimated effect of rise in government spending associated with BBA approved in 2018.
    - Policy uncertainty: estimated impact of rise in policy uncertainty in 2018.
    - Market power: estimate of reduced effectiveness of TCJA compared with previous postwar episodes due to higher level of market power in 2018.
    - Actual: difference between 2018 growth outcome and Fall 2017 forecast.
    - Residual: other factors contributing to difference between predicted impact of TCJA and BBA and Actual.

### Budgetary Impact of the Tax Cuts and Jobs Act (Table 1)
- Budgetary impact (Percent of pre-TCJA projected GDP) — static estimates from Joint Committee on Taxation (2017) in percent of Congressional Budget Office (June 2017) fiscal year GDP projections:
  - Total: 2018 = -0.7; 2019 = -1.4; 2020 = -1.2; 2027 = 0.1
  - Individual Tax Reform: 2018 = -0.4; 2019 = -0.9; 2020 = -0.8; 2027 = 0.3
  - Pass-through tax cut: 2018 = -0.1; 2019 = -0.2; 2020 = -0.2; 2027 = 0.0
  - Other (individual): 2018 = -0.2; 2019 = -0.7; 2020 = -0.6; 2027 = 0.3
  - Business Tax Reform: 2018 = -0.6; 2019 = -0.6; 2020 = -0.5; 2027 = -0.2
  - Reduction in CIT rate (35% to 21%): 2018 = -0.5; 2019 = -0.6; 2020 = -0.6; 2027 = -0.6
  - Expensing of capital spending: 2018 = -0.2; 2019 = -0.2; 2020 = -0.1; 2027 = 0.0
  - Other (business): 2018 = 0.0; 2019 = 0.1; 2020 = 0.2; 2027 = 0.3
  - International Tax Reform: 2018 = 0.3; 2019 = 0.2; 2020 = 0.1; 2027 = 0.0
  - Memorandum — Pass-through and CIT rate cut: 2018 = -0.6; 2019 = -0.8; 2020 = -0.8; 2027 = -0.6

### Firm-level and Cross-country Empirical Estimates (Tables 2 and 3)
- Table 2: Estimated effect of tax-based fiscal expansion of 1 percent of GDP on firm investment and employment (percentage points).
  - Equation specified: Y_ijkt = β ΔF_kt + γ(ΔF_kt × ln μ_ijkt) + Σ_x θ_x x_ijkt + Σ_i α_i + Σ_t θ_t + ε_ijkt
  - Notes: Clustered standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1. Dependent variables are investment rate (columns 1–3) and employment growth rate (columns 4–6). Explanatory variables include country-level fiscal shock ΔF, (log) markup μ, and interaction term. Firm- and year-fixed effects included. Columns (2) and (5) include country-time fixed effects. Columns (3) and (6) include country-time- and industry-time-fixed effects. Markup estimates from Díez, Leigh and Tambunlertchai (2018). Fiscal shocks from Guajardo, Leigh, and Pescatori (2014).
  - Selected coefficient estimates (with standard errors):
    - Fiscal shock: 1.218*** (0.108) in column (1); 1.487*** (0.126) in column (2)
    - Fiscal shock × markup:
      - Column (1): -1.374*** (0.389)
      - Column (2): -1.117*** (0.420)
      - Column (3): -1.406*** (0.416)
      - Column (4): -1.756*** (0.392)
      - Column (5): -0.700* (0.424)
      - Column (6): -1.048** (0.429)
  - Fixed effects: Firm FE Yes; Time FE Yes; Country × time FE included in columns as noted; Industry × time FE included in columns as noted.
  - Number of observations: Investment rate regressions 204,251; Employment growth regressions 190,207.
  - R-squared:
    - Investment rate: 0.074 (col 1), 0.093 (col 2), 0.114 (col 3)
    - Employment growth: 0.035 (col 4), 0.062 (col 5), 0.073 (col 6)

- Table 3: Cross-section estimation results: U.S. S&P 500 companies in 2018.
  - Equation specified: Y_ij = β ln μ_ij + Σ_j α_j + ε_ij
  - Notes: Clustered standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1. Dependent variables: growth rate in firm-level capital expenditure and change in growth rate in firm-level capital expenditure in 2018. Regressions control for industry-fixed effects. Markup estimates from Díez, Leigh and Tambunlertchai (2018).
  - Coefficient estimates:
    - Markup (log) in 2016 on CapEx Growth in 2018: -0.057** (0.026)
    - Markup (log) in 2016 on Δ CapEx Growth in 2018: -0.147*** (0.050)
  - Industry fixed effects: Yes
  - Observations: 344 (CapEx Growth), 342 (Δ CapEx Growth)
  - R-squared: 0.098 (CapEx Growth), 0.056 (Δ CapEx Growth)

*Source: wpiea2019120 - Introduction to the Tax Cuts and Jobs Act: Part 1.*

---


_Source: https://www.imf.org/-/media/files/publications/wp/2019/wpiea2019120.pdf_