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.
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.