Analysis: Tax Reform Will Increase Capital Formation, Leading to Higher Wages and Employment

Capital inflows will speed up expansion of employment and U.S. industries

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The Tax Cuts and Jobs Act, recently passed by both the House and the Senate, will increase capital formation, which will lead to higher wages and employment, according to an analysis from the Tax Foundation.

"We estimate that the Act will boost investment, employment, and incomes in the United States," the report says. "It will facilitate the expansion of U.S. capital stock, our productive capacity, and our ability to compete in the world."

The Tax Foundation explains that because the corporate tax rate will be cut to 21 percent, it is projected that long-run GDP will increase by 1.7 percent. This would lead to $1.8 trillion in the quality of equipment, commercial, residential structures, and plants, which would boost employment, wages, and productivity.

The bill's provisions of immediate expensing, reduced income tax rates, and reduced rates on businesses would make GDP closer to 4.7 percent. It is projected that capital stock would be closer to $5 trillion more.

"The higher returns on capital will cause people to save more, to buy more American stocks and bonds, and to pump more money into their small businesses," the report states. "The corporate and individual tax reductions on business income, and the faster depreciation permitted by expensing, will boost businesses' saving directly by raising after-tax cash flow."

The analysis also says the new capital that includes equipment and structures would earn enough to pay for its own replacement and maintenance. Because the bill will lead to higher incomes and investment, it will make it a better environment for hiring and production.

"As the added capital is put in place, American wages and employment will rise, and the total amount of saving done by Americans will rise," the report says. "As Americans add to their assets, some of the government bonds that foreigners may have initially bought may be refinanced by Americans."

"The associated capital-inflow will speed the expansion of U.S. industry and employment," the Tax Foundation explains.

According to the report, there is about a quarter of a quadrillion dollars that is projected over the next decade for global saving and a small portion of that may be redirected to the United States.

"U.S. may repatriate cash held abroad," the analysis says. "U.S. banks and mutual funds may lend more at home and less abroad. Foreign banks, mutual funds, and individuals may lend more or invest more in the United States and less at home. Foreign businesses may expand their U.S. subsidiaries."