The Tax Cuts and Jobs Act (TCJA), enacted in 2017, is a prime example of supply-side economic policymaking, focusing on reducing the cost of capital across the economy. In contrast, the CHIPS and Science Act (CHIPS) and Inflation Reduction Act (IRA), both enacted in 2022, represent an alternative approach, focusing on large subsidies for semiconductors and renewable energy.
While these approaches differ, they share a common reliance on new capital investment driving productivity growth, which in turn grows the economy and raises wages for workers. However, the effects of these tax policies on productivity and wage variables can be difficult to isolate, particularly in the short term.
Following the TCJA, private nonresidential fixed investment outperformed pre-TCJA expectations. In contrast, following the IRA and CHIPS Act, aggregate private nonresidential fixed investment has roughly followed pre-law baseline projections, but the subcomponent of manufacturing structure investment has boomed.
It’s important to be cautious about drawing too-strong conclusions based on the data so far. However, there is plenty of reason to be skeptical of the merits of sector-specific policymaking exemplified in IRA/CHIPS.
The TCJA, representing the old approach, focused on broad improvement in the tax treatment of business investment across the board. The new push for industrial policy, as seen in the IRA and CHIPS, provides substantial support for the renewable energy and semiconductor industries, respectively.
The policies are still new, especially IRA and CHIPS. Data so far is limited, and isolating the effects of IRA and CHIPS in particular is challenging due to the post-pandemic economic rebound, associated turmoil, and substantial interest rate hikes by the Federal Reserve.
However, we can compare and contrast the justifications for each policy and determine how to best evaluate whether they have reached their goals. As we continue to monitor the impact of these policies, it’s crucial to remember the importance of responsible financial citizenship and complying with tax laws.
For more in-depth analysis, visit Tax Foundation.