How TCJA Impact the Business Bottom Line

Who is Paying Corporate Taxes and Who is Not

The Tax Cuts and Jobs Act (TCJA) is a legislation that was passed by a Republican-controlled Congress and signed into law on December 22, 2017. It stemmed up from long-term lobbying by firms to decrease the federal corporate incomes which they pay, with the theory that such cuts will trigger capital investment, job growth, and economic development (Internal Revenue Service, 2018). The legislation significantly reduced the national corporate income tax rate by approximately one-third, even though the pre-tax profits have continued to increase towards historic highs. This is because the rate had been slashed from 35% to 21%. TCJA has positively favored large and profitable firms as most of them are not paying tax (Hager & Baines, 2020). The study examined 379 prosperous Fortune 500 companies and found that in 2018, the corporations, on average, paid a tax rate of 11.3%. Approximately a quarter, 91, of them, paid no federal income tax in 2018. In 2018, only one-sixth of the companies analyzed paid tax rates that surpassed the statutory rate (Gardner et al., 2019). This was primarily because it was a repayment of the taxes that they had deferred in the previous years.

The Size of Corporate Tax Subsidies

The implementation of the TCJA in the U.S. has brought about significant changes in the financial sector, especially with regard to corporate tax subsidies. For instance, the 379 firms examined in Gardener et al. (2019), earned pretax profits $of 765 billion in 2018. If all those profiwere ts reported to the IRS, and the statutory rate applied, the federal government would have earned $161 billion. However, in reality, the firms as a cluster paid approximately 54% of that amount. Therefore, they enjoyed an extra $73.9 billion. When broken down, half of the tax subsidies in 2018, $37.1 billion, went to 25 corporations, with each having more than $650 million (Gardener et al., 2019). The Bank of America led with more than $5.5 billion, and it was followed by J.P. Morgan Chase, Wells Fargo, A,mazon and Verizon.

Tax Rates (and Subsidies) by Industry

TCJA’s revenue impacts significantly vary by industry. When the business sector is separated into sectors, the tax liability is expected to decrease but with differential impact by industry. In 2018, the effective tax rates averaged across all industries, subjective to their size, declined from 21.2% to 9.1% (University of Pennsylvania, 2017). Considering the initial legislation, several capital investments would have slowly decreased over the subsequent years. Nevertheless, under the TCJA, the reduction has been accelerated, thereby resulting in less effective tax rates. Indeed, corporations are advantaged by it because an instantaneous tax depreciation is held more worth than a future reduction (University of Pennsylvania, 2017). Based on Appendix 1, capital intensive industries (under the definition of the North American Industry Classification System), for example, the real estate, transportation, utilities, health services ,and agriculture gain the most from the TCJA in that their effective rates exceed the statutory rate. This can be attributed to the fact that in sinstancesance, capital investments were fully expensed, and no future depreciation was permitted (University of Pennsylvania, 2017). Furthermore, the restrictions on net interest deductions amplify taxes, although the book income is net of interest payments.

It is essential to note that some industries, for instance, agriculture, are heavily debt-financed, hence, their effective tax rates rise above 21% even before expensing starts phasing out. Moreover, in Appendix 1, it is seen that the manufacturing and mining industries record minor drops in effective tax rates in comparison to the average across all sectors (University of Pennsylvania, 2017). This is a result of their preferential treatment under the current legislation; thus, their rates fall minimally.

Impact of TCJA on the Bottom-line of Small Businesses

TCJA impacts almost every type of business. Small business owners must understand how the provisions of the new legislation affect their botbottom lineor instance, before it, companies often referred to as “C corporations” paid 15 to 35% in taxes (Internal Revenue Service, 2019). However, with the advent of the new law, the corporate tax rate was reduced at standardized at 21%. Second, TCJA has proven to be fruitful for pass-through entities that had larger deductions. Small companies, also known as pass-through entities – the business revenue “passes through” the corporations and directly into the owners’ pockets, have the managers paying the taxes rather than the company (Internal Revenue Service, 2019). TCJA has covered this loophole by allowing small business owners to deduct up to 20% of their total business income.

The third change that the policy brings about is the amount of cash, which companies can deduct for expenses. They can use up to $1 million or the total amount of the companies’ annual revenue in equipment expenses (Internal Revenue Service, 2019). Moreover, they can utilize the expense deduction to purchase used equipment. Lastly, the cap for the depreciation deduction of automobiles has increased (Internal Revenue Service, 2019). The before-mentioned explanations show how the drastic changes associated with TCJA have overall lessened the tax and financial burdens of businesses, and these effects have trickled down to small business owners.

Final Thoughts

Winners and Losers of Two years of TCJA

One of the primary claims of those lobbying for the TCJA was that the tax cuts would instigate an increase in investments, hence, improving employee productivity, for instance, by purchasing new factories and equipment. Consequentially, such investments would increase the company revenues, and workers would capture this by benefitting from higher wages. However, in the two years that the legislation has been enforced, this chain of reasoning has been flawed. Corporations have not significantly increased investment; in fact, nonresidential fixed assets have elicited a negative trend since the beginning of 2018 (Kopp et al., 2019). Nevertheless, this might be attributed to the existence of absurd tariff policies.

Furthermore, after the passage of TCJA, companies started directing their extra tax windfall to shareholders. According to a study conducted by Kopp et al. (2019), the results showed that the top S&P corporations funneled approximately 20% of their increased cash flow towards research and development or capital expenditures. The remaining 80% was dedicated to asset planning adjustments, such as buybacks and dividends. Such kinds of investments greatly benefit the wealthy and foreign investors, who own a substantial portion of the corporate stocks. It is predicted that long-term, the effects of these type of business behavior will have an uncertain impact on the welfare of workers. Two years later, investments are on the decline. Factories are being closed, and the era of mass layoffs has not yet ended (Kopp et al., 2019). The wage growth is moderate in spite of the continued economic expansion, and the gross domestic product (GDP) is slackening. In the meantime, the budget deficits are greater because of the revenue losses that have significantly been initiated by the massive corporate tax cut rooting from TCJA.

Impact on the Economy

Another central argument of the proponents of TCJA was that the subsidies would lead to increased economic competitiveness. This is because U.S. companies would report a lesser amount of tax on their revenues; thus, giving them an advantage of those of other countries. Prior to the TCJA, America’s effective tax rates aligned to that of the chief trading partners, and it raised comparatively less revenue than its peers in the Organization for Economic Cooperation and Development (OECD). Since the enforcement of the TCJA, America has collected only 1% of GDP in corporate tax revenue, which is one-third of the OECD average (Hendricks & Hanlon, 2019). Regardless, the law has led to more job creation as six million jobs have been added since January 2017 (Gale et al., 2018). Unemployment in the country is at a 50-year low.

Conclusion

It has been approximately three years since TCJA was passed by the Congress. Based on the effects that the tax cut has had on businesses, it has become clear that the law will not meet its proponents. It has achieved less and cost much more than its promised objectives. So far, the tax cuts have only benefited wealthy individuals and large corporations, and the middle and working-class families are experiencing moderate benefits. Therefore, Congress must revise the bill to ensure that revenue is raised progressively.

References

Gale, W. G., Gelnfond, H., Krupkin, A., Mazur, M. J., & Toder, E. (2018). Effects of the Tax Cuts and Jobs Act: A preliminary analysis. Tax Policy Center.

Gardner, M., Roque, L., & Wamhoff, S. (2019). Corporate tax avoidance in the first year of the Trump Tax Law. Institute on Taxation and Economic Policy.

Hager, S. B., & Baines, J. (2020). The tax advantage of big business: How the structure of corporate taxation fuels concentration and inequality, politics & society. Econstor.

Hendricks, G., & Hanlon, S. (2019). The TCJA 2 years later: Corporations, not workers, are the big winners. American Progress.

Internal Revenue Service. (2018). Tax reform: What’s new for your business. Web.

Internal Revenue Service. (2019). Tax Cuts and Jobs Act: A comparison for businesses.

Kopp, E., Leigh, D., Mursula, S., Tambunlerchai, S. (2019). U.S. investment since the Tax Cuts and Jobs Act of 2017. International Monetary Fund.

University of Pennsylvania. (2017). The tax cuts and jobs act, as reported by conference committee (12/15/17): Tax effects by industry.

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