Taxes

Cut Corporate Taxes to Boost Growth (But Don't Exaggerate)

Fans and critics are both overstating their cases. What shouldn't get lost is the boon to workers.

Like so many things in Washington, the debate over the effects of cutting the corporate tax rate has become too hot for its own good. President Donald Trump and his aides share some responsibility for this due to their exaggerated claims for its benefits. But their rhetorical excess shouldn't obscure the fact that cutting the corporate rate is worth doing.

Lowering corporate income taxes would increase the wages of workers. That's not just a political talking point; it's the consensus view of professional economists. To understand why, remember that only individuals can bear the burden of taxes. The corporate income tax is levied on corporations, but they are just organizing entities. Individuals carry its costs.

Not that long ago, economists tended to think that the owners of capital bore the entire economic burden of the corporate income tax in the form of, for example, lower dividend payments from stock holdings.

That view has shifted because economic conditions have changed. Today, capital can more easily leave the U.S. economy for other countries than it could in the past, whereas U.S. workers are much less internationally mobile. So it’s a lot easier for shareholders to avoid the corporate tax than it is for workers. Less capital in the U.S. means less productive workers and lower wages—a form in which workers pay when corporations are taxed. Some recent economic research finds that workers actually bear the majority of the corporate tax.

Of course, this research isn’t perfect, and often omits important real-world factors. For example, if a company is generating profits in part because of its brand name, then taxing those profits won’t necessarily lead the firm to increase its investment. Under this scenario, a lower corporate tax does not benefit workers.

As you can see, there’s a lot here for economists to sort through, and no single research paper can answer this question definitively. The nonpartisan Congressional Budget Office has come to the conclusion that 25 percent of the burden of the corporate income tax is borne by workers. The Tax Policy Center prefers a slightly lower number, 20 percent.

The White House has argued that cutting the corporate tax rate to 20 percent from 35 percent would increase annual wages between $4,000 and $9,000 for the average household. This estimate is considerably higher than I would expect. But the precise magnitude of the wage increase is less important than the expectation that wages would increase by some amount.

Reading some of the criticism of the White House analysis would lead you to form a different expectation. No one has a crystal ball, but these critics overstate their case in implying that we shouldn’t expect wages to increase following a corporate rate cut. We should.

The Trump administration has undermined its case for a corporate tax cut by exaggerating the benefits of its overall tax package. For example, the assertion by Treasury Secretary Steven Mnuchin that a Republican leadership tax plan would generate $2 trillion of additional tax revenue over the next 10 years through economic growth would very likely be proven false.

Much of Mnuchin’s forecast is driven by the expectation of economic growth generated by the corporate cut. Critics have correctly argued that the plentiful cash holdings of many corporations, today’s low cost of capital, and an economy that is reasonably close to full employment suggest that a lower corporate rate might not induce a significant amount of additional investment.

But the point of cutting the corporate rate is not to increase economic growth over the next few years. It is to encourage business investment for the next several decades, when today’s economic conditions and corporate balance sheets are just a memory.

The U.S. has the fourth highest effective corporate rate among the nations of the Group of 20. It is absurd for the U.S. to be this globally uncompetitive. President Barack Obama understood this, which is why he proposed reducing the rate to 28 percent.

Exaggerated claims are no reason to keep the U.S. at a competitive disadvantage, or to avoid policy changes that would increase investment, productivity, wages and economic growth over the long term, and that have a recent history of bipartisan support. I hope that those who supported a corporate-rate reduction in the Obama years will do so now, as well.

Of course, many critics of the GOP leaders’ framework are reacting to the entire package, and not just to the corporate tax provisions. They're right that it needs to be improved. It should eliminate more of the current code’s tax deductions and exclusions than it does. It should not increase the national debt over the long term, in part by moderating the amount of individual income-tax relief targeted at wealthy households.

This would focus the plan on growth, for which workers will be grateful.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Michael R. Strain at mstrain4@bloomberg.net

    To contact the editor responsible for this story:
    Jonathan Landman at jlandman4@bloomberg.net

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE
    Comments