Magazine article HRMagazine

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

Magazine article HRMagazine

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

Article excerpt


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-wellaware 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. …

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