Left-Leaning Group’s Study Finds TCJA Encouraged Foreign-Owned Companies to Invest in U.S.  

The Republican Tax Cuts and Jobs Act (TCJA) made the United States a more competitive place to do business and led to more investment in the economy from foreign-owned U.S. businesses, according to a new study by the left-of-center Tax Policy Center.

TPC’s study focused on the effects of corporate tax reduction, including the reduction of the corporate tax rate from 35 to 21 percent, allowing full expensing of equipment investments, and the new deduction for foreign derived intangible income (FDII). The study noted a positive relationship between the “tax cuts and foreign-owned companies’ investment in U.S. tangible assets.” 

The study evaluated two measures of foreign investment: inbound foreign direct investment (FDI) and foreign-owned U.S. companies’ investment in tangible assets like property, plant, and equipment (PPE).  

The study found that the TCJA strongly increased foreign direct investment into the United States: 

“Estimates indicate that FDI [foreign direct investment] financed with retained earnings rose in response to the cut in US EMTRs [effective marginal tax rates] and EATRs [effective average tax rates], even when controlling for GDP growth and dollar exchange rates. On average, retained earnings rose about 0.5 percent in response to each percentage-point fall in the EMTR and 3 percent in response to each one-point fall in the EATR. The investment response to the change in EATRs is similar to that found in in other economic studies.” 

The study also found that investment in tangible assets (PPE) rose as a result of the tax cuts: 

“Investment in PPE also rose following the TCJA tax cut, but less strongly. On average, about 0.35 percent for each percentage point decline in the EMTR and 0.75 percent for each percentage point decline in the EATR. However, the relationship between tangible investment and tax rates weakened when macroeconomic controls were introduced.   

TCJA tax cuts thus appear to have spurred investment in tangible assets mainly through their stimulative effect on aggregate demand. This finding corroborates other early empirical studies of TCJA by Bill Gale and Claire Haldeman and the International Monetary Fund.” 

These results are consistent with other studies finding that the TCJA led to increased investment in the American economy. For example, one International Monetary Fund working paper found “that U.S. business investment since 2017 has grown strongly compared to pre-TCJA forecasts and that the overriding factor driving it has been the strength of expected aggregate demand.” 

Competitive business taxes benefit American workers in the form of more jobs, higher wages, and lower prices of goods and services. 

For instance, one Treasury Department study estimated that “a country with a 1 percentage point lower tax rate than its competitors attracts 3 percent more capital.” In other words, a higher corporate rate makes the United States a less attractive place to invest, while a lower corporate rate makes the U.S, a more attractive place to invest.

Additionally, corporate taxes are primarily borne by workers. According to the Stephen Entin of the Tax Foundation, labor (or workers) bears an estimated 70 percent of the corporate income tax in the form of wages and employment. Similarly, a 2012 paper at the University of Warwick and University of Oxford found that a $1 increase in the corporate tax reduces wages by 92 cents in the long term.

Corporate taxes are also borne by consumers in the form of higher prices. When taxes are higher, companies will pass on this cost to consumers. According to a 2020 National Bureau of Economic Research paper, 31 percent of the corporate tax rate is borne by consumers through higher prices of goods and services.

The Left continues to claim that the TCJA only benefitted the top one percent and did little to improve the economy, despite growing evidence that this isn’t the case. If Democrats repealed TCJA, as many have proposed, the U.S. would see plummeting investment, hurting economic growth, wage growth, and jobs.