Last week, CNN ran an op-ed with the headline “America needs higher wages, not lower taxes.”
At a first glance, I immediately thought “well, what do you think tax cuts do?” Obviously they boost wages, because the only wage that matters to a worker is his pay after taxes.
OK – obviously the writer over at CNN acknowledges that, but seems to think that lowering taxes won’t have any economic benefits that would be a boost for wages. He writes, “our problem is not our tax burden. Our problem is low wages. If economic growth is truly the goal, raising workers’ wages should be our national focus, not cutting taxes. There’s no argument over who benefits from the current Republican proposal to cut taxes, if you put aside ideology and honestly look at the numbers. According to analyses from the Tax Policy Center and the Institute on Taxation and Economic Policy, more than two-thirds of the tax cuts would benefit the richest 1% of Americans in 2018.”
Let’s assume his statistic is true. Suppose tax reform boosted everyone’s income by 10%. Even if everyone benefited the same in terms of percentage gain, the top 1% would garner most of the gains. Let’s look at an example. The top 1% of U.S. households earned an average income of $1,153,298 in 2013, compared to $52,250 for the median U.S. household. If everyone got a 10% boost in income, the top 1% would gain $115,329, compared to “only” $5,225 for the median household – which we sincerely doubt they’d have a problem with.
But forget the progressive spin, let’s look at the numbers. According to the Heritage Foundation:
- The President’s Council of Economic Advisors recently released a report showing that updating the U.S. business tax code to compete with other countries around the world could boost worker’s wages by $4,000, and as much as $9,000 a year.
- American corporations pay a federal income tax rate of 35 percent – one of the highest in the world. If tax reform can lower that rate to 20 percent, American businesses and the workers they employ will be globally competitive again. Businesses will invest more, hire more workers, and be forced by the laws of supply and demand to raise wages.
- This is exactly what happened over the past decade and half in neighboring Canada. In 2007, they began lowering their corporate tax rate, and guess what? Wages grew significantly faster in Canada than other comparable countries.
Not only would a decrease in the corporate income tax increase wages by improving the economy, thereby increasing demand for workers (and thus wages), there’s an economic consensus that corporations offset the corporate income tax in part by lowering the wages of workers below what they’d pay in absence of the tax.
So how much of the burden of the corporate tax do the workers bear? To review the studies (source – pages 100-101):
- A review of the empirical literature on corporate tax conducted by the U.S Department of the Treasury found that, “labor may bear a substantial portion of the burden from the corporate income tax.”
- Economist Arnold C. Harberger has found that labor bears over 80% of the corporate tax.
- Kevin Hassett and Aparna Mathur of the American Enterprise Institute, a conservative think tank, found that for every 1 percent increase in corporate tax rates, wages decrease by nearly 1 percent.
- Wiji Arulampalam, Michael P. Devereux, and Giorgia Maffini of Oxford University found that for every $1 increase in the corporate income rate, wages are reduced by 92 cents in the long run.
- According to economist Alison Fenis, a one percentage point increase in the corporate income tax decreases annual wages by 0.7 percent.
In that regard, not only would a decrease in the corporate income tax benefit shareholders (and thus the stock market as a whole) by boosting earnings, it would benefit the main stakeholders of those companies, their workers.
What would you do with an extra $4,000 to $9,000? For one, I’m sure many workers would finally enjoy being able to purchase health insurance options outside the disastrous ones Obamacare provides them.
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