Beware of Trump’s claim that wages will soar after he cuts taxes

AMERICAN’S middle class is hungry for a raise after years of stagnant pay. President Donald Trump keeps saying that he can make bigger pay cheques happen.

Trump argues that wages will jump after he cuts business tax rates. He’s been saying that for months. His plan will “lower tax rates for business to create more jobs and higher wages for Americans,” Trump told a group of lawmakers on Tuesday as he tried to win support for his plan to make the corporate tax rate 20 per cent, a major cut from the current 35 per cent level.

Other Republican lawmakers have picked up the talking point.

“If we lower the tax rates, these kinds of (American) companies will prosper, will grow, will hire, they’ll increase wages,” House Speaker Paul Ryan, Wisconsin, said Tuesday, echoing Trump. “There’s no doubt about it, this country needs this.”

So is the claim true? Do wages always rise when corporate tax rates go down?

Well, it didn’t happen after the 1986 Tax Reform Act. Wages fell in the months and years after President Ronald Reagan signed the bipartisan legislation in October 1986, which slashed the corporate tax rate from 46 to 34 per cent.

Average weekly wages for rank-and-file workers (nonsupervisors) went from US$ 285 a week in the autumn of 1986 to US$ 282 a week in October 1987, according to Labour Department statistics that are adjusted for inflation. And they kept dropping. Average weekly wages hit US$ 271 a week by 1990.

There aren’t any other time frames to check because the United States hasn’t done any big overhauls to corporate tax rates since 1986.

But other countries have. Economic scholars have studied what happened elsewhere to try to figure out if tax cuts spur higher wages. Their conclusions are all over the place.

“There’s just not any evidence that there’s a huge effect on wages or economic growth” if you cut business taxes, says Len Burman, co-founder of the Tax Policy Centre, a think tank, and a former Treasury official under President Bill Clinton. “It’s irresponsible to overhype the claims.” Burman has found the vast majority of the benefits of a corporate tax cut will go to the wealthy. But many right-leaning scholars say the opposite. — WPBloomberg