The voices of Tax Policy Center's researchers and staff
The White House Council of Economic Advisers put out a paper this week defending a very bold prediction: A cut in the corporate tax rate from 35 percent to 20 percent would boost incomes of US workers by at least $4,000-a-year.
CEA chair Kevin Hassett is a leading proponent of the theory that workers ultimately pay all the corporate tax and, thus, would receive huge benefits from a cut in the levy. If true, it would be a politically compelling argument at a time when public opinion surveys show that as much as 60 percent of the public is opposed to cutting corporate taxes.
The debate over who ultimately pays the corporate tax, and thus who would benefit from a corporate tax cut, is highly contentious. Most economists believe that the tax is paid by some combination of shareholders, workers, and owners of capital. But who pays how much?
Far from settled
While the CEA paper presents the claim of a permanent $4,000-plus annual increase in worker incomes as settled economics, it is far from that. Indeed, Hassett’s claim that labor bears several times the burden of corporate taxes is at the far edge of the debate and is based on some sloppy and highly controversial methodology.
The Tax Policy Center, the Congressional Budget Office, and the congressional Joint Committee on Taxation estimate that workers pay roughly one-fifth to one-quarter of the corporate tax. Others say it is more, perhaps half, but few claim it is anywhere near as much as Hassett estimates.
The CEA paper looks at only one piece of last month’s Unified Framework. It ignores other important elements, such as its call for a territorial tax system, its plan for partial expensing of capital investment, and—importantly—the higher deficits it implies.
The paper never says when workers would get this wage boost. At one point, it forecasts this would occur in the “medium term” while at another it says the wage effects are “long run” but it never defines either time-frame. Nor does it say how the $4,000 would be distributed among income groups.
A complicated story
And it never explains just how workers would get this added income. But for them to get this much benefit, each step in a complicated four-part story would have to work perfectly. Lower US corporate tax rates must attract lots of new investment capital. Corporations must use the money to purchase a lot of new equipment for their US businesses. All that new investment must make US workers much more productive. And, finally, that productivity growth must translate into far higher wages.
Some of the elements of this story are reasonable. But the size of the benefits at each step are inconsistent with historical evidence and academic research.
For example, lower corporate taxes likely would attract some new capital that would help US businesses purchase new productivity-enhancing equipment. But no research finds that investment would increase so much that productivity would grow by multiples of the corporate rate cut.
And to the degree new capital comes from overseas, much of the return to that new investment would end up in the pockets of foreign investors-- not US workers, as my colleague Ben Page shows.
At the same time, US-based firms might choose to invest in countries with even lower tax rates. Even a 20 percent corporate tax rate would be higher than in many nations and, where it is not, some countries would likely follow the US tax rate cut with one of their own.
The weakest link in the story, however, may be the assertion that increased productivity would translate to higher wages for rank-and-file workers. This concept has been a bedrock of economics for generations. Yet, over the past three decades, that foundation has crumbled. There are lots of possible reasons why: Competition from foreign labor (the explanation favored by President Trump); the collapse of private sector unions that reduces worker bargaining power; the rapid increase in health care costs that has crowded out cash compensation; the profound change in the nature of work driven by new technology; all of the above; or something else entirely.
But whatever the reason, while US corporations have enjoyed big increases in profits since the 1980s, wages of ordinary workers have hardly kept up—though compensation for corporate executives has.
$13 for $1
In his own research, Hassett implies that a $1 increase in corporate taxes would lower wages by $13, according to an analysis by Jane Gravelle of the Congressional Research Service. The CEA paper is more cautious but still far from the mainstream: It implies that workers would receive more than $3 for every $1 in tax cuts.
Many economists find that Hassett’s basic conclusion—that wages would rise by a multiple of the corporate tax cut—is simply…impossible. Part of the problem is the math. Corporate taxes represent about 2.5 percent of GDP, while wages represent about half. How can even a big change in a small factor have such a large effect on a big factor?
CEA says that research from Harvard University economist Mihir Desai supports its projection. But in a series of tweets Desai says the CEA “misinterprets results of our paper.” And he adds, “Cutting corporate taxes will help wages but exaggeration only serves to undercut the reasonableness of the core argument.”
Reed College economist Kim Clausing, who specializes in corporate taxes, puts it this way: “If Hassett is correct…companies should want higher corporate taxes.”
The CEA paper is correct when it says US corporate tax cuts would generate some new investment that might result in some new capital spending that might generate some increase in wages. But the magnitude of the wage hikes the CEA paper promises is simply not supported by either the facts on the ground or the academic research.
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