Cutting corporate taxes will not boost American wages
The Trump administration is marketing its plan to give huge tax cuts to the richest U.S. households with a bold but fanciful claim: that these tax cuts will trickle down to help American workers by boosting economy-wide productivity and hence wages. The plan—the Unified Framework for Fixing Our Broken Tax Code—would (among other changes) reduce the statutory federal corporate tax rate from 35 percent to 20 percent. In a recent paper addressing the effect of the “Unified Framework” on wages of American workers, the administration’s Council of Economic Advisers asserts,
This analysis from the Council of Economic Advisers reviews the evidence that has driven other developed countries to pursue the path of lower corporate tax rates and estimates how business tax reform in the Unified Framework for Fixing Our Broken Tax Code (hereafter, the “Unified Framework”) is expected to affect wages for American workers.
Reducing the statutory federal corporate tax rate from 35 to 20 percent would … increase average household income in the United States by, very conservatively, $4,000 annually. The increases recur each year, and the estimated total value of corporate tax reform for the average U.S. household is therefore substantially higher than $4,000. (CEA 2017)
This claim is clearly wrong. Economic logic and evidence argues strongly that American workers should not expect any noticeable wage boost from cutting corporate income taxes. The main findings of this paper are:
- Since World War II, productivity and wage growth in the U.S. economy have been significantly greater in periods with higher corporate tax rates.
- There is essentially no robust relationship between post-tax profit rates and productivity-enhancing business investment in the U.S. economy. This weak relationship is why efforts to boost post-tax profit rates with tax cuts will likely do little to grow productivity.
- Even were productivity to grow, it would not necessarily lead to wage growth (i.e., productivity growth is a necessary, not a sufficient, condition for wage growth). In fact, in recent decades, the link between economy-wide productivity growth and wages of the vast majority of American workers has been almost entirely severed. In other words, pay and productivity used to rise tightly together but they no longer do.
- A steep corporate tax rate cut in 1986 did nothing to reverse the widening fissure between typical workers’ pay and productivity growth—a gap that was already apparent in that year. Another corporate cut today would likely again fail to reconnect pay and productivity.