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Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Saturday, October 21, 2017

Clausing & Kleinbard: Trump’s Economists Say A Corporate Tax Cut Will Raise Wages by $4,000. It Doesn’t Add Up.

Following up on Tuesday's post, Council of Economic Advisers: Reducing Corporate Tax Rate From 35% To 20% Would Increase Household Income By $4,000/Year:  Kimberly Clausing (Reed) & Edward Kleinbard (USC), Trump’s Economists Say a Corporate Tax Cut Will Raise Wages by $4,000. It Doesn’t Add Up.:

The President’s Council of Economic Advisers claims that slashing the corporate tax rate to 20 percent would boost the average American’s wages by $4,000 per year (“very conservatively”) — and perhaps by as much as $9,000. If true, that would be a remarkable gain for working Americans.

Unfortunately, it’s extraordinarily unlikely to be true.

The two of us can think of dozens of objections to the CEA claim, presented in an official report, but perhaps the place to start is with the United Kingdom, which has already run this experiment. Over the past decade, the United Kingdom has slashed its corporate tax rate, in several steps, from 30 percent down to 19 percent. At the same time, the United States has kept its corporate tax rate constant at 35 percent. Like the United States, Britain has a large open economy, investors in British firms come from all over the world, and Britain provides a sound legal and regulatory environment.

So what happened to wages after Britain cut corporate taxes? The following chart tells the story. As UK corporate tax rates fell, so did real (inflation-adjusted) median wages. That is, wages moved in the opposite direction from that predicted by the CEA. Meanwhile, in the United States, real median wages crept up — not quickly enough, but at least moving in the right direction. Even if you start the clock in 2013, after the Great Recession, UK wage growth didn’t keep pace with that of the United States.

Kleinbard

The US corporate tax system is in need of genuine reform, and that may well include a lower statutory rate. But tax reform should not be perverted into a tax windfall for capital owners on the pretense that it’s good for the working man.

http://taxprof.typepad.com/taxprof_blog/2017/10/clausing-kleinbard-trumps-economists-say-a-corporate-tax-cut-will-raise-wages-by-4000-it-doesnt-add-.html

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Comments

Sounds a bit like the old claim that health care reform would cut the cost of a typical household's insurance premium by up to $2,500 per year, in absolute dollars:

http://www.politifact.com/truth-o-meter/promises/obameter/promise/521/cut-cost-typical-familys-health-insurance-premium-/

Posted by: MM | Oct 21, 2017 10:11:12 AM

Another Word for Fake Tax Math, at
http://mauledagain.blogspot.com/2017/10/#5989009447697786719 (20 Oct 2017)

Posted by: James Edward Maule | Oct 21, 2017 11:11:36 AM

No can be totally certain that huge wage gains won't follow a corporate tax rate cut. As for causation, "extraordinarily unlikely to be true" is accurate; "preposterous" is more succinct.

Posted by: Pat Oglesby | Oct 21, 2017 11:49:56 AM

It would be funny if laws contained a snap back provision that resulted in automatic repeal and reinstatement of prior law if the new law did not live up to its promises.

Posted by: Bill | Oct 21, 2017 6:48:22 PM

No, given the attitudes of today's corporate world, an inordinate share of a tax cut that brings money back into this country will end up going to the top executives and board members. That's as predictable as rain in winter Seattle.

Why? Because those who off-shore jobs where the labor is cheapest, who keep their profits off-shore where the taxes are lowest, and who use all sorts of tricks to evade taxes are greedy, amoral SOBs. There's no fix for that.

That is, except one. That's prison time for those in corporate positions who commit white-collar crimes on a huge scale. Why should a guy who takes $50 from a 7-11 go to prison, but not executives at Apple, Google and others who used the "double Dutch" to evade taxes running into the billions? Keep in mind these aren't small businessmen who can't afford high-priced tax lawyers. The executives at Apple, Google and the rest were told precisely the illegality of what they were going but did it anyway, assuming they could get away with it or, failing that, not be personally punished.

We need to not only fix the white-collar loophole, we need to bring some proportionality to it. The more that's taken, the more the time.

Posted by: Michael W. Perry | Oct 22, 2017 4:47:18 AM

We can also look to the Kansas experiment to predict how Trump’s tax plan will work out. In 2012, Tea Party Governor Sam Brownback imposed massive tax cuts that he promised would generate explosive growth in the Kansas economy leading to increased state revenue. The Kansas experiment failed. Overall growth and job creation in Kansas underperformed both the national economy and neighboring states. Tea party politicians had nothing but excuses. They claimed tax cuts take a long time to take effect. They blamed a decline in agriculture as the cause of the stagnant economy. State revenue also crashed because of the tax cuts. In order to balance the budget, the tea party then gutted education, highway spending, and other state programs. Some schools ended the year early because they did not have the money to continue to operate. The disgraceful tea party claimed the budget shortfalls were not due to the tax cuts, but were rather due to excessive spending.

Posted by: anon JD/MD | Oct 22, 2017 7:54:39 AM

Bill, thus my quote in another commentary,
Fool Us Once on Taxes, Shame on You, Fool Us Twice . . . , at http://mauledagain.blogspot.com/2017/10/#8882077169943437176, in which I quoted an earlier commentary: "Years ago, the phrase “show me the money” entered into the vernacular. Perhaps it’s time to say, “show us the jobs.” Show us the jobs, the nation will reply in gratitude with a tax break. No jobs, no tax breaks. That’s how tax law inducement provisions work. The “no tax breaks, no jobs” threat is nothing more than bully posturing of the worst sort. There’s a reason the tax-cut-extension advocates don’t like the “show us the jobs, then get the tax break” approach. They know that they’ve created few jobs, particularly enduring jobs, in response to previous tax cuts, and that the nation will not see any sort of job surge with an extension of the tax cuts."

Posted by: James Edward Maule | Oct 22, 2017 10:28:35 AM

Tax planning = white collar crime?

It is like all of society forgets that the money used to pay taxes actually belong to the company/individual - not the government - at least until the government takes it.

Posted by: taxtaxtax | Oct 22, 2017 2:37:39 PM

The UBS disclosures showed 19000 Americans with hidden bank accounts there.

Shouldn't the top 1,000 have been prosecuted for tax evasion? This would be a very different environment if they had.

Posted by: Jim harper | Oct 24, 2017 11:51:06 AM