Adding a Dash of Tax Reasoning
Terry H. Schwadron
Oct. 21, 2017
For those who might want a dose of reasoning (good or bad) with their tax policy, the White House’s Council of Economic Advisers published a study this week to justify cutting corporate taxes. Their argument: By doing so, we would raise employee wages by an average $4,000 a year.
Yes, General Electric should pay less tax (some years they have paid none) because the company is going to turn around and give the savings to you, their worker.
If you simply accept this thinking as true, I remind you that there is a bridge for sale between Brooklyn and Manhattan.
You can see the study here.
While the general evidence from previous tax cuts is that companies use any saved money to pay off outstanding debt, pay out dividends to shareholders, buy back stock or hold onto any savings for later investments, the Council, led by former Goldman-Sachs president Gary D. Cohn, cherry picks its research to insist that over time such investment by companies eventually will result in a $4,000 raise in otherwise stagnant employee wages.
President Trump has already been using that figure his speeches around the country as he argues for the tax cut program. Maybe by repeating it, the suggestion will prove true. The general thinking, of course, is that to be more competitive globally, the United States needs to reduce its corporate tax rates from about 35% to 20%, a rate that is higher than the previous target of 15%. Of course, the effective tax rate among companies is closer to 25%, but still, the plan is for less for companies. (And thus we have a parallel argument going on about how much cutting corporate and individual taxes, with an emphasis on taxes affecting the rich, will put us further in debt.)
Among other things, companies with international holdings would be granted additional incentives to “re-patriatize” their holdings overseas by bringing them back to the United States to pay U.S. taxes instead of Irish taxes, for example. And, of course, the rest of the tax cut package would be aimed at a variety of other incomes, ranging from reducing the number and rates paid by individuals, elimination of the estate (death) taxes, allowing more lenient tax rates for money earned through partnerships and other legal arrangements, and simplifying the basic tax filing forms.
In the report, the Council said that the main reason why cutting the corporate tax rate would boost wages is because doing so would make it less expensive for companies to invest in capital assets such as machines. “More assets like machines let workers produce more, and when workers can produce more, businesses can afford to pay their workers more.”
Naturally, that statement assumes that infusing more technology into manufacturing processes will not eliminate work, or will incent better-paying jobs to oversee the machines, but, again, experience is showing us that adding robots indeed is remaking industries and reducing employment in manufacturing.
In the report, the Council argued that a number of studies have shown that lowering corporate taxes has “substantial effects on wages.” The Council estimated based on “conservative” estimates from academic literature that the corporate tax cuts in the GOP’s framework would raise average household wage and salary income annually by $4,000. More optimistic estimates suggest that average household income would increase by more than $9,000 per year, the Council said.Using 2016 dollars, average income would increase from $83,143 to between $87,520 and $92,222, while median household income would increase from $59,039 in 2016 to between $62,147 and $65,486, the study estimated.
To summarize, the report said, the literature finds that worker wages are lower when corporate taxes are higher. Capital deepening, which brings additional returns to the owners of capital, brings returns to workers as well.
The study relied on other theoretical studies or economic reports. There are no real world examples included that show the overall figures actually at work in a particular company or industry.
I think we should tell the White House that we get it, that lowering corporate tax rates may well incent growth of businesses on a variety of fronts. But please don’t insult us by suggesting that the reason you want to do this is to help employee wages. The idea that companies are busily calculating how to split up the proposed tax savings for employee raises is simply wrong.
Nevertheless, seeing an attempt to provide reasoning is a welcome, if equally depressing departure from the usual Trump fare.