The Crporate Tax Cut and the Earnings of American Workers

Kevin Hassett, Trump's selection to chair the President's Council of Economic Advisors, has said “The truth is a tax cut like [cutting the statutory corporate income tax from 35% to 20%--DAC] this very conservatively will increase the median wage about $4,000 a year.”   That would result in earnings increases for U.S. workers of about $616 billion per year (based on the current employment level of about 154 million.  While I cannot find an estimate of the number of workers employed by general corporations, what I have found suggests that only around 50% of US workers work for such firms (or around 77 million workers).  And this would suggest that the average increase in earnings of corporate employees would have to rise by about $8,000 per worker.  So here's what I would say--do not count on Hassett's forecast coming true at any time in the foreseeable future.

If U.S. corporations were, in fact paying the statutory rate, and if their profits continued at their 2016 level ($2 trillion), corporate tax liabilities would fall from about $750 billion to about $414 billion.  Since 2011, however, the average effective corporate tax rate has been...about 20%.  Independent estimates of the effect of restructuring the corporate tax rate along the lines being proposed suggest that corporations would see tax reductions of about $200 billion.  

So there is a real disconnect here.  Hassett's estimate of the effect of the tax cut on worker earnings is about 50% higher than the total receipts from the corporate income tax, and about 3 times the size of other estimates of the corporate tax saving.  Either of those estimates of the relationship between earnings and corporate income tax cuts seems, at best, over-optimistic.  They imply that after-tax corporate income would fall, and no study ever conducted of the incidence of the corporate income tax suggests such an outcome.  And note that this is from a cut in corporate income taxes; the reduction in corporate income tax rates would not directly affect non-corporate entities.

In fact, the number of general corporations in the US has declined by about 1 million since 1986, as alternative forms of organization have increased.  This change has been driven by several factors, but it suggests that corporate income taxes have become of declining importance--and, therefore, that reductions in corporate income tax rates are likely to be less and less important.

We might well conclude that corporate income taxes are an inefficient method or raising revenues.  But to suggest that reducing the existing corporate tax rate would lead to explosive growth in the average earnings of all US workers--or even of the average earnings of corporate employees--is to engage in fantasy.

"Those who have served..."

There is something I find myself almost forced to say, which is a response to a part of this comment by Kelly at his press conference:

“We don't look down upon those who haven't served,” Kelly said at the end of the presser. “In a way we're a bit sorry because you'll never experience the wonderful joy you get in your heart when you do the kind of things our service men and women do.”

The words "those who have served" the country and "those who haven't served" are *dangerous*, because they imply, even if they do not say explicitly, that only those who have been in the military have "served" America. Consider the public health service doctors who help provide health care in difficult situations. Consider the researchers at the Centers for Disease Control. Consider the people who work to help low income families and the homeless find affordable housing. Consider the people who volunteer in shelters, in soup kitchens, in schools.

Consider the people at the BLS or the BEA who compile and analyze data that help us understand how our country is doing. Consider the lawyers at the DOJ--criminal or civil--who help protect us and our rights. Consider the folks who investigate airline/railroad crashes, trying to make out lives safer...the people working at the Consumer Product Safety Commission...at the Consumer Finance Protection Bureau...in law enforcement at the national level.

Consider the people whose work, at the Department of Transportation is essential in building and maintaining roads designed for safety as well as speed of transportation...the people at the EPA working to protect peoples lives and health...

To collapse "service" to this country into one very narrow thing is to do a disservice to millions of people whose work does not require them to wear uniforms, but does represent service to this country. By suggesting otherwise, Kelly is, whether he believes it or not, "looking down on," denigrating the work of millions of Americans who have the well-being and, yes, the safety of this country at the core of their lives.