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October 15, 2026

The effects of the 2017 US corporate tax cut

Eighty-seven percent of the increase in personal earnings went to workers in the top of the income distribution.

Tyler Smith

President Donald J. Trump celebrates the passage of the Tax Cuts Act with Vice President Mike Pence, Senate Majority Leader Mitch McConnell, and Speaker of the House Paul Ryan

Source: The White House from Washington, DC, Public domain

In 2017, Congress enacted the Tax Cuts and Jobs Act (TCJA), the largest corporate income tax cut in US history. Before the bill’s passage, advocates forecast that a corporate rate cut would boost investment and substantially raise wages, while skeptics argued that the benefits would primarily flow to the wealthy.

In a paper in the American Economic Review, Patrick J. Kennedy, Christine L. Dobridge, Paul Landefeld, and Jacob Mortenson used employer–employee matched federal tax records to estimate how the tax cut affected firms and their workers.

The TCJA cut the top tax rate for the type of firm known as a “C corporation” from 35 percent to 21 percent. Entities known as “S corporations,” whose income is taxed on their owners' personal returns, received a smaller reduction. The authors used an event-study design that compared similarly sized C and S corporations in the same industry before and after the reform. Because these two types of corporations share many features and face similar tax incentives, the comparison between them provided an opportunity to identify causal effects.

The researchers found that relative to S corporations, C corporations increased their capital stock by 4.6 percent, payrolls by 2.0 percent, and employment by 1.3 percent. Dividend payouts rose by 16.2 percent. However, as skeptics predicted, income gains largely flowed to those at the top of the income distribution.

Figure 7 from the authors’ paper shows how the payroll gains were distributed within the firms.

Figure 7 from Kennedy et al. (2026)

Panels A through D plot the estimated difference in earnings between C and S corporations for three years prior to and following 2016. Before the reform, earnings at the two types of firms followed similar trends. Afterward, mean earnings at C corporations rose by 0.7 percent (Panel A), while relative median earnings did not change (Panel B). Earnings at the ninety-fifth percentile rose by 1.2 percent (Panel C), and earnings of the five highest-paid workers—the authors' proxy for executives—rose by 2.6 percent (Panel D).

Panel E plots the estimated effect at each centile of the within-firm earnings distribution above the twentieth percentile. Below the ninetieth percentile, the estimates were statistically indistinguishable from zero. They then climbed from 0.7 percent at the ninetieth percentile to 2.3 percent at the ninety-ninth. The authors calculated that average earnings rose by approximately $2,100 for workers at the ninety-fifth percentile, whose average earnings were $170,740 in 2016, and by $9,700 for those in the top 5 percent, whose average earnings were $374,595.

Overall, the authors estimated that 60 percent of the gains from the cut for C corporations flowed to firm owners, 8 percent to executives, 32 percent to other workers in the top 10 percent of the wage distribution, and 0 percent to workers in the bottom 90 percent. After accounting for workers' ownership of capital, 87 percent of the gains accrued to the top 10 percent of earners.