October 16, 2017

White House study: Corporate tax cut will provide huge boost to wages

President Trump's goal of lowering the corporate tax rate will boost the average family's income by $4,000 to $9,000 each year, according to a new analysis released Monday by his new economic adviser.

Kevin Hassett, the newly-installed chairman of the Council of Economic Advisers, published a brief paper finding the corporate tax cut would provide a massive boost to household income, based on a "conservative estimate" of the relationship between corporate tax rates around the world and wages.

The 14-page paper comes a week after President Trump teased the $4,000 figure in a speech on tax reform in Harrisburg, Penn.

It provides academic heft to the pro-worker rationale for the centerpiece of the GOP tax reform plan, namely a reduction in the corporate tax rate from 35 percent today to 20 percent. Democrats have criticized the package as promising benefits for businesses but not for families. Hassett's paper will provide a basis for Republicans to challenge that attack.

At the heart of Hassett's argument is the observation that, in recent years, countries with low corporate tax rates have seen higher wage gains than countries with high corporate tax rates.

In explaining that relationship, and laying out how lowering corporate taxes would boost wages, Hassett leans heavily on the fact that U.S. companies have gamed the tax system in recent years to route taxable income through tax havens.

"America's broken corporate tax system creates incentives for firms to hold their money outside of our borders," Hassett told reporters Sunday. "When firms hold their money overseas rather than invest them in America, they're holding down the productivity of the American economy and the wages of American workers."

In fact, Hassett argued, corporate tax planning undertaken to avoid the high U.S. tax rate explains much of the recent disconnect between corporate profits, which have grown robustly in recent years, and workers' wages, which have not.

Lowering the U.S. tax rate, he argued, will limit such gaming of the tax system. And it will encourage investment in plants in equipment, because investments that are marginally profitable under today's tax code will become worthwhile if taxed less.

Hassett calculates the 15 percent corporate rate cut could increase average household incomes from $83,143 in 2016 to between $87,520 and $92,222. Median household income -- meaning earnings for more of a typical household -- would rise from $59,039 to between $62,147 and $65,486. On Sunday's call Hassett mused the income gains could kick in quickly as businesses brought back the trillions in foreign earners they currently have overseas.

Democrats have charged that, instead, corporations will likely just pay out those earnings to shareholders.

Notably, Hassett is known for reckoning that much of the benefit of corporate tax cuts would accrue to workers, rather than to corporate owners, a consideration closely related to the topic of his paper.

The Trump administration has consistently maintained the preponderance of the benefits of corporate tax cuts would accrue to workers, something that could happen if businesses use the tax savings to invest in their company and increase productivity.

Yet Congress' own tax experts have estimated that only around a fifth of the corporate tax is borne by workers. Last month, the Treasury raised eyebrows by removing from its site a 2012 analysis that found similar results.

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