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Monday, October 23, 2017

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.


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