## U.S. Investment Since the Tax Cuts and Jobs Act of 2017

_IMF Working Papers, May 31, 2019_

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## Bibliographic details
- Authors: Emanuel Kopp, Daniel Leigh, Susanna Mursula, Suchanan Tambunlertchai
- Published: May 31, 2019
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781498317047.001

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### Summary findings
- There is no consensus on how strongly the Tax Cuts and Jobs Act (TCJA) has stimulated U.S. private fixed investment.
- Two contrasting interpretations are noted:
  - Some argue the business tax provisions spurred investment by cutting the cost of capital.
  - Others view the TCJA primarily as a windfall for shareholders.
- The authors find:
  - U.S. business investment since 2017 has grown strongly compared to pre-TCJA forecasts.
  - The overriding factor driving investment growth has been the strength of expected aggregate demand.
  - Investment has, so far, fallen short of predictions based on the postwar relation with tax cuts.
  - Model simulations and firm-level data suggest much of this weaker response reflects a lower sensitivity of investment to tax policy changes in the current environment of greater corporate market power.
  - Economic policy uncertainty in 2018 played a relatively small role in dampening investment growth.

### Evidence and analysis
- Comparative growth:
  - Business investment since 2017 versus pre-TCJA forecasts shows strong growth, but below historical (postwar) tax-cut response predictions.
- Mechanisms examined:
  - Cost-of-capital channel: TCJA’s business tax provisions could lower cost of capital and spur investment.
  - Distributional channel: TCJA could act as a shareholder windfall rather than stimulate new capital formation.
  - Aggregate demand channel: Expected aggregate demand strength identified as the overriding driver of investment growth since 2017.
  - Market power channel: Greater corporate market power is associated with a lower sensitivity of investment to tax policy changes, as indicated by model simulations and firm-level data.
  - Uncertainty channel: Economic policy uncertainty in 2018 had a relatively small dampening effect on investment growth.

### Policy implications and interpretation
- Tax policy alone may be insufficient to elicit historical magnitudes of investment response if corporate market power has increased and dampened firms’ sensitivity to tax-induced cost-of-capital changes.
- Strengthening aggregate demand appears crucial for supporting business investment; policies aimed at demand stimulation may be more effective in the observed context than relying solely on tax cuts.
- Monitoring firm-level behavior and market structure is important to assess the transmission of tax policy to investment.

### Publication and metadata
- Authors: Emanuel Kopp, Daniel Leigh, Susanna Mursula, Suchanan Tambunlertchai
- Date: May 31, 2019
- Pages: 37
- Volume: 2019
- Issue: 120
- Series: Working Paper No. 2019/120
- DOI: https://doi.org/10.5089/9781498317047.001
- Stock No: WPIEA2019120
- ISBN: 9781498317047
- ISSN: 1018-5941
- Subjects: Capital spending; Corporate income tax; Employment; Expenditure; Labor; National accounts; Private investment; Taxes
- Keywords: aggregate demand; business investment; capital expenditure; Capital spending; company markup; Corporate income tax; Employment; employment behavior; firm level; fiscal policy; Global; growth impact; Investment; investment growth; investment growth impact; investment response; market power; Private investment; response to the TCJA; savings company; uncertainty; WP

*Source: IMF Working Paper "U.S. Investment Since the Tax Cuts and Jobs Act of 2017" by Emanuel Kopp, Daniel Leigh, Susanna Mursula, and Suchanan Tambunlertchai, May 31, 2019.*

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_Source: https://www.imf.org/en/publications/wp/issues/2019/05/31/u-s-46942_