POINT/COUNTERPOINT
WILL CORPORATE TAX CUTS
RESULT IN HIGHER WAGES FOR
U.S. WORKERS?
Without a doubt, workers are benefting 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-fle workers wouldn’t see
bigger paychecks. Now that the act
has become law, more than 400 frms
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 refect the
boost to compensation that the tax
act’s proponents have promised.
Those should still be in the ofng.
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 ma-
which labor bears the burden of cor-
porate levies, the general consensus
is that they harm workers and result
in lower wages. Using hourly man-
ufacturing wage data for 72 coun-
tries 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 benefts 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.
chines 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 frst 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 larg-
est contributor to the decline in labor
productivity in the past fve years is a
reduction in capital deepening.”
If wages are driven by productivity,
and productivity is getting dragged
down by diminished capital invest-
ment, 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
The benefits of the 2017 tax
bill are just beginning.
