How much did TCJA boost wages? It’s complicated.

A renewal of the 2017 Tax Cuts and Jobs Act (TCJA) is at hand. Eight years after Congress cut corporate taxes from 35 percent to 21 percent and allowed firms to write off certain investments immediately, it is clear that the reform boosted investment considerably. That alone is a strong argument for extending the key supply-side provisions, but policymakers ought to look at what happened to wages too, which were predicted to rise in tandem with the increase in investment.

Figuring out whether TCJA actually raised wages is tricky because the post-2017 economy was hit by several extraordinary events, including a commodity boom and a global pandemic. To know the law’s effects, we have to imagine a parallel world in which the tax rate never fell and compare it with the one we live in: a counterfactual we never observe directly. We cannot simply compare wages before and after a reform and say that the reform caused the wage change.

Before getting into the evidence, it is useful to review the causal chain for why a corporate tax cut would increase wages. In the textbook model, the tax cut raises the after-tax return on capital, which causes firms to invest more. That additional investment translates into higher capital per worker—what economists often call “capital deepening”—which makes workers more productive and thus increases wages. As a result, the incidence—i.e., who pays the tax—of a business tax cut falls entirely on labor and pushes up real wages one-for-one. 

Practically, compare a farmer digging with a shovel versus with his hands. In the latter case, he cannot dig very much and his productivity is low, so he cannot be paid much. With the shovel (more capital), he can produce more and hence his wage should rise to compensate. However, reality is a bit more complicated. It takes time to get the shovel in the farmer’s hands, and so wages often take some time to rise in response to more investment. That is why observers care the most about long-run effects, even though we cannot directly observe those effects.

That lag makes it difficult to evaluate the empirical effects of business tax cuts on wages because the certainty that the reform caused a change in wages decreases as we get farther away from it. With that caveat in mind, we can look at some of the evidence, most of which is limited by a lack of medium-run or long-run effects since it has not been very long since the initial reform.   

Effects of tax cuts on investment

Tax cuts generally promote investment. The key metric for evaluating this effect in the academic literature is the percentage change in investment given a percentage point decline in the tax rate. To use the example above, it tells us how much spending on shovels changes when we cut the tax on the return to investing in them. That number is called the “investment elasticity.” A recent survey of such estimates from Gabriel Chodorow-Reich, Owen Zidar, and Eric Zwick in the Journal of Economic Perspectives indicates that the answer is probably somewhere between 0.5 and 1. That means that if the government cuts the tax rate by one percent, firms roughly increase their investment spending by between 0.5 and one percent.

In studies focusing specifically on TCJA, the investment elasticity is around 0.5. For example, the same team of co-authors in the Journal of Economic Perspectives piece estimates an elasticity around 0.5 using data prior to 2020, while a team led by Patrick Kennedy of UCLA has a similar estimate. Their strategies differ, but the baseline result is the same.

In a separate study, Jon Hartley, Kevin Hassett, and Josh Rauh estimate an elasticity roughly three times larger. 

The first part of the theoretical channel from tax cuts to investment to wages to hold in the data. That is, we generally observe that tax cuts promote investment. The remaining question is whether the increase in investment translates into an increase in wages.

Evidence on wages

Even before TCJA, the best empirical evidence points toward labor sharing about half the benefit of a corporate tax cut in the short run. For example, a team of German economists published a 2018 paper in the American Economic Review that used 6,800 municipal tax rate changes and found that workers absorb about 30–50 percent of a corporate tax shock. In the United States, Juan Carlos Suárez Serrato and Owen Zidar exploit U.S. state variation in business taxes and estimate a 40–75 percent labor share. While they are not measuring the same outcomes, Xavier Giroud and Josh Rauh estimate that a one percent increase in the corporate tax rate tends to reduce employment by 0.5 percent, which is similar to the Suárez Serrato and Zidar estimate. However, some results indicate that supply-side investment incentives have no effect on wages, even if they may boost employment overall.

Altogether, the evidence indicates that prior to TCJA, the textbook supply-side story is perhaps half right in the short run.

Evaluations of the wage effects of TCJA can be broadly lumped into two categories. The first looks at average effects and the other at the effects along the income distribution.

In “Tax Policy and Investment in a Global Economy,” Gabriel Chodorow-Reich, Owen Zidar, and Eric Zwick estimate a long-run real-wage gain of about 0.9 percent, or roughly $700 per worker. If the TCJA were extended as is, that would plausibly lead to an increase of three percent. However, that relies on only two years of post-TCJA investment data. My own work estimates an average wage gain of around 0.4 percent by 2027. 

Aggregate means, however, hide stark distributional splits. Patrick Kennedy, Christine Dobridge, Paul Landefeld, and Jacob Mortenson exploit the fact that C-corporations received a much larger statutory cut than otherwise similar S-corporations and track the two groups in matched W-2 tax data. They find that 51 percent of the windfall accrued to shareholders, 10 percent to top-five executives, 38 percent to other workers already above the firm’s 90th percentile, and zero to the bottom nine deciles.

The below figure comes directly from the Kennedy et. al paper. It plots the percent increase in wage gains within a firm following TCJA. For example, the 50th centile captures the annual earnings of the median worker within the firm, while the 100th would be the top earner in the firm pre-reform. Evidently, the gains accrued largely at the top of the income distribution. Because the distribution is only within firms, it is not necessarily representative of the income distribution as a whole.

Because C-corp versus S-corp status is not random—larger, faster-growing firms tend to choose C-corp status—the comparison may understate wage pass-through.

The Kennedy et al. results mirror those from Max Risch, who estimates that about 10–20 percent of the tax burden goes through to wages, but that burden is largely borne by the highest earners in firms. That is, the evidence indicates that so far, business tax cuts do not seem to affect the middle or bottom of the income distribution very much. 

On the other hand, the papers above show that TCJA has succeeded in raising the capital stock, so productivity and wages should rise as models predict. History suggests those gains arrive slowly; the Kennedy et al. and Chodorow-Reich et al. papers cover just two post-TCJA years, hardly enough time for capital deepening to run its course. Firms are buying the shovels and building the tractors, so it stands to reason that wages will rise too.

Additionally, there is strong reason to think that the papers above are missing something important. Most studies look at companies that got a bigger tax cut and compare them with those that didn’t. Such analysis shows who gained more, but it can miss what happened to everyone’s paycheck on average. 

In a recent report, the Council of Economic Advisers (CEA) estimates that wages actually rose by nearly $5,000 on average between 2017 and 2019. Their figure comes from a comparison between the Congressional Budget Office baseline for 2019 versus what actually happened, which may be getting at the average effects missing in the above papers. CEA’s approach asks, “What happened to wages relative to the official pre-TCJA forecast for the whole economy?” The micro papers, by contrast, ask, “Which groups gained more or less than others?” Each lens captures a different slice of the truth.

In sum, the large investment effects are present, but the evidence is slightly more mixed on wages.

Policymakers hoping to hasten and broaden the wage gains have tools at hand. First, they can complement the tax cut with deregulatory reforms that lower entry barriers and spur investment where it is most sluggish; faster capital formation shortens the lag between tax policy and productivity. Second, they can streamline occupational licensing and land-use rules that impede worker mobility, boosting labor’s bargaining power and the local elasticity of labor supply. Third, they should reinforce competition policy in labor markets: non-compete bans and greater wage-transparency rules can help ensure that when profits rise, firms must bid harder for workers across the wage distribution. Finally, policymakers may consider pairing future business tax relief with incentives—such as wage credits or broadened employee-ownership plans—that tie firm-level tax benefits directly to rank-and-file pay.

The promise of higher wages through lower corporate taxes is certainly not wrong, but it is incomplete and necessarily takes time to work out; according to some estimates, that perhaps takes 40 years. Eight years in, the evidence indicates that capital got cheaper, investment ticked up, and wage gains—though positive on average—remained modest and possibly skewed toward the top. The long run may yet deliver larger aggregate payoffs, but waiting passively is risky. Combining the rate cuts with deregulation and pro-competition policies would accelerate capital deepening and distribute its fruits more widely.