Will Corporate Tax Cuts Result in Higher Wages for U.S. Workers?

Two economists debate the issue.

By Gordon Gray and Matthew Gardner March 22, 2018

The benefits of the 2017 tax bill are just beginning.

Without a doubt, workers are benefiting from the Tax Cuts and Jobs Act, and their initial compensation gains are just the beginning.

In the weeks and months leading up to Congress’ December passage of the legislation—which lowered the corporate tax rate to 21 percent from 35 percent—some critics argued that the tax cut would provide a windfall only to wealthy corporations and that rank-and-file workers wouldn’t see bigger paychecks. Now that the act has become law, more than 400 firms have announced pay increases, bonuses or bigger 401(k) contributions for 4 million Americans.

That’s good news, but the increased wages and bonuses employees are enjoying now don’t really reflect the boost to compensation that the tax act’s proponents have promised. Those should still be in the offing.

To understand why, let’s take a closer look at the factors that drive compensation.

Most workers are all-too-well-aware that wages have been growing very slowly in recent years. Indeed, the U.S. Census Bureau found that wage gains for full-time workers were essentially zero in 2016.

Myriad factors contribute to wage growth, but essential components include productivity and “capital deepening.” The latter is a gauge for how many resources, such as machines or equipment, are available to workers. It follows that an employee operating a John Deere backhoe, for example, will get more done than one with a shovel.

Recently, the measure has actually fallen and taken productivity along with it. Capital deepening went negative in 2014—meaning that, for the first time, U.S. workers had less capital at their disposal than in the past. According to the last Economic Report of the President released by the Obama administration in late 2016, “In the United States, the largest contributor to the decline in labor productivity in the past five years is a reduction in capital deepening.”

If wages are driven by productivity, and productivity is getting dragged down by diminished capital investment, an obvious policy choice to boost output and pay is to increase companies’ incentives to invest. And that is precisely what the business provisions of the 2017 tax act are designed to do.

Economic literature bears out the connection between corporate taxes and compensation. While economists disagree about the degree to which labor bears the burden of corporate levies, the general consensus is that they harm workers and result in lower wages. Using hourly manufacturing wage data for 72 countries over 22 years, one study found that for every 1 percent increase in corporate tax rates, wages decrease 1 percent. Other research found that $1 in additional corporate levies reduces pay by 92 cents.

The open question, of course, is when and to what degree the benefits of the act will show up in workers’ paychecks. The Tax Foundation estimates that workers will see their pay increase by 1.5 percent over the long term. The Council of Economic Advisers calculates that an average family will see an extra $4,000 in earnings. Either estimate would represent progress.

The initial evidence is in, and the economics are solidly behind the principle that corporate tax cuts result in higher wages for American workers.

Gordon Gray is director of fiscal policy at the American Action Forum in Washington, D.C.

Trickle-down tax breaks will have little effect.

On the campaign trail, President Donald Trump linked a reduction in the corporate tax rate to the well-being of American workers. Yet early evidence suggests that shareholders are the big winners from the Tax Cuts and Jobs Act so far.

This proof comes, ironically, from the dozens of companies that have recently announced one-time bonuses and wage boosts. In some cases, they have attributed this generosity to the new law, which Trump signed in December. Walmart, for one, announced that it would boost its minimum wage to $11 an hour. But this bump likely represents just one-sixth of the annual tax savings the company will enjoy going forward.

The average American worker’s share of the corporate cuts is even smaller. For every employer like Walmart that has shown a commitment to permanently increasing pay, others have promised to use the savings to finance one-time bonuses or to fund stock buybacks or even layoffs.

Stock market research firm Birinyi Associates estimates that S&P 500 corporations early this year had announced $5.6 billion of wage boosts and bonuses—and a whopping $171 billion of stock buybacks.

So, while some benefits of a corporate tax cut will trickle down to workers in the form of higher wages, most won’t.

Numerous analysts agree that businesses are unlikely to change their long-term strategic plans based on new tax rates under the 2017 act. American companies have enjoyed a multiyear boom in profits. Many were flush with enough cash to make new capital investments long before the corporate tax cuts were enacted.   

In addition, low interest rates meant that even cash-poor companies could easily bankroll new investments. All of this suggests that the leaders of Fortune 500 corporations aren’t likely to increase investment or revamp their hiring plans in the wake of their new windfall.

This hasn’t stopped companies from beating the public relations drum to highlight their efforts to reward their employees. And to be sure, an estimated $5.6 billion of wage bumps, taken on its own, could be seen as a victory for the Trump administration—but only if these increases are truly due to the 2017 corporate tax cuts. 

In less political times, that would be a hard claim to support. When Walmart boosted its minimum wage to $10 in 2016, the move was widely attributed to a tight labor market and the retailer’s need to keep pace with Target’s starting wages. The story is very similar now: Last fall, with the unemployment rate edging lower, Target hiked its minimum pay for workers above Walmart’s.

So why should Walmart’s latest wage increase be viewed as the result of anything but a response to a competitive labor market? For that matter, why wouldn’t the flurry of bonus announcements at the end of last year be recognized mainly as something hundreds of Fortune 500 corporations do every holiday season?

The stagnation of middle-class wages is a long-standing problem. American workers deserve policies that are designed to bolster family income in a meaningful way, not trickle-down corporate tax breaks that will have only an incidental effect.

Matthew Gardner is a senior fellow at the Institute on Taxation and Economic Policy in Washington, D.C.

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