Featured Articles

White House Pitches Corporate Tax Cuts as Windfall to Workers

Posted on October 17, 2017 by Jonathan Curry

Reducing the corporate tax rate to 20 percent would increase average household income by $4,000 annually, the White House Council of Economic Advisers (CEA) said in a new report, adding that “more optimistic estimates” suggest the proposed corporate rate cuts could actually result in a $9,000 increase.

The Trump administration has never been shy about describing its proposed corporate tax cuts as a windfall for middle-income Americans, and President Trump previewed the $4,000 estimate in an October 11 tax reform speech. The benefits of the corporate rate cut would be felt by workers in both high- and low-skilled jobs, the October 16 CEA report says. In his speech, Trump tied the $4,000 increase in household income to the deemed repatriation provision in the Republican tax reform framework, but sources within the administration indicated the increase stemmed from either the corporate rate cut or a combination of all the corporate tax changes in the framework.

The CEA noted that until the late 1980s, workers’ wages rose commensurately with corporate profits; since then, however, real median wage income has remained nearly stagnant, while “real corporate profits soared.” This disparity, according to the report, “reflects the state of international competition,” because other countries have attracted capital by reducing their corporate tax rates, while the United States has not.

Average wage growth in the 10 OECD countries with the lowest corporate tax rates has been “substantially higher” than in the 10 OECD countries with the highest corporate tax rates, according to the CEA, noting that the average corporate tax rates of the two groups differ by 13.9 percentage points. That gap is on “about the same scale” as the corporate rate cut Republicans are considering now, the report says, suggesting the United States could see similar increases in wage growth.

“The impact suggested by the empirical literature is highly consistent with predictions of theoretical models, increasing our confidence that these effects are real,” the report says.

In addition to at least a $4,000 increase in average household income, a lower corporate rate would reduce corporate profit shifting, leading to increased investment domestically, the report contends. “Household income boosts from this channel may be additive,” it says.

The CEA added that while full expensing would also likely increase worker productivity and wages, its effect was not included in the $4,000 estimate.

‘Won’t Happen, Full Stop’

The notion that cutting the U.S. corporate tax rate to 20 percent would likely boost household wage income by as much as $9,000 struck several economists as a stretch.

Alan Cole, an independent policy analyst and former economist for the Tax Foundation, told Tax Analysts that those predictions “won’t happen, full stop.”

“They might be plausible for a smaller country with less bargaining power and jurisdictional authority, but not for the U.S.,” said Cole.

Former CEA economist Greg Leiserson, now with the Washington Center for Equitable Growth, was similarly skeptical, saying in an email that the “conclusions of the CEA report are implausible and unrealistic.”

According to Leiserson, the $4,000 and $9,000 figures appear to be derived from three terms: the corporate tax rate change; an assumed elasticity or response to the corporate tax rate; and average wages. That calculation, he said, essentially assumes that the only thing affecting wages is the corporate tax rate and ignores other elements like cost recovery, interest deductibility, deficits, and passthrough tax rates, which differ from other corporations’ rates under the Republican tax reform framework.

“This renders the report either so incomplete as to be meaningless or simply incorrect,” Leiserson concluded.

Meanwhile, Aparna Mathur, an economist with the American Enterprise Institute, told Tax Analysts that the $4,000 estimate was plausible “if you go strictly by the empirical estimates that have been derived in the literature.”

The CEA analysis isn’t factually incorrect, said Mathur, who has co-written several studies with CEA Chair Kevin Hassett. Rather, she said it presents findings on the effect of lowering the corporate tax rate on wages, while controlling for other factors, which is what any economic analysis would do. “One way to interpret that would be to say that these effects could plausibly arise conditional on everything else in the economy continuing as normal,” she explained.

“From my perspective, if the tax cuts are not paired with some type of base broadening, and we see massive increases in debts and the deficit, this could be a drag on growth, and we won’t see the wage increases that we anticipate — or at least not the full extent of them,” Mathur said.

As for the report’s findings on the gap in wage growth between OECD countries with higher corporate tax rates and those with lower rates, Leiserson dismissed the comparison as overly simplistic. He noted that the OECD countries with the lowest corporate taxes tend to be smaller and have more lower-income taxpayers than the United States, while the countries with the highest rates are more comparable to the United States in size and incomes.

Leiserson also highlighted the example of the United Kingdom, which falls into the group of 10 OECD countries with the lowest corporate tax rates. He noted that though the United Kingdom is more comparable with the United States, it has much lower wage growth than the average for that group of countries.

Mathur was more ambivalent on that point: “I don’t think the exact magnitude of the wage gap or tax gap matters between the two sets of countries they highlight. The larger point is just that, in general, countries with higher corporate tax rates have not been that beneficial for workers.”

Cole also argued that the report fails to account for the “adjustment path” for the influx of investment that would spark an increase in wages, which, he said, is “slow and has lots of frictions.” Cole explained that the new investment would be partially financed by foreigners, which would create a cascade of reactions: Currency markets would have to adjust, importers and exporters would have to change their resource allocations to increase U.S. net imports, and the focus of labor would shift from export goods to new capital investment.

“This sounds like a thing that would take time! And of course, it would. It’s an open question of how long,” Cole said.

Cole ultimately considered the report a poor reflection on Hassett’s tenure as CEA chair.

“The chief economist serving the president should be held to a higher standard than the peanut gallery,” he said. “He hasn’t met that standard so far.”

Luca Gattoni-Celli contributed to this article.

Follow Jonathan Curry (@jtcurry005) on Twitter for real-time updates.