How cor­po­rate tax cuts would ben­e­fit work­ers

Calhoun Times - - FRONT PAGE -

Busi­nesses sel­dom raise wages due to a sense of cor­po­rate benev­o­lence. Rather, wages rise when the de­mand for work­ers in­creases. This forces busi­nesses to in­crease wages out of self-in­ter­est, to keep their em­ploy­ees from be­ing hired away by com­peti­tors.

This ba­sic tenet of eco­nomics ex­plains why cor­po­rate tax cuts pro­duce higher wages for work­ers.

That may seem coun­ter­in­tu­itive. Most peo­ple think a cor­po­rate tax cut just means big­ger prof­its for busi­nesses — prof­its that are used to line the pock­ets of the rich: the own­ers, cor­po­rate ex­ec­u­tives and share­hold­ers. But what ac­tu­ally hap­pens is way more com­pli­cated, and it’s very good news for work­ers.

First, let’s look at the big pic­ture. The U.S. cor­po­rate in­come tax rate is one of the high­est in the world. On top of the 35 per­cent fed­eral tax rate there are state taxes, bring­ing the av­er­age top cor­po­rate rate to nearly 40 per­cent of tax­able in­come. Other pro­vi­sions of the tax code — such as not al­low­ing firms to fully deduct their cap­i­tal ex­penses — help make the U.S. busi­ness tax en­vi­ron­ment one of the most bur­den­some in the world.

That’s some­thing that in­vestors, both for­eign and do­mes­tic, weigh heav­ily when de­cid­ing where to build their new fac­tory or back a new busi­ness ven­ture. Put an­other way, our cur­rent busi­ness tax en­vi­ron­ment dis­cour­ages in­vest­ment in Amer­ica. For­eign and do­mes­tic in­vest­ment dol­lars still flow, but they flow else­where, as in­vestors choose to set up shop in other coun­tries.

To­day, busi­ness in­vest­ment in the United States is un­usu­ally low. In­vest­ment per worker is 8 per­cent be­low the his­toric norm, ac­cord­ing to a 2015 re­port by the Chicago Fed­eral Re­serve Bank. And sub­par in­vest­ment cre­ates huge prob­lems.

Busi­nesses make in­vest­ments, in things like ma­chin­ery and new tech­nol­ogy, so that their em­ploy­ees can be­come more pro­duc­tive. As em­ploy­ees pro­duce more, prof­its go up, en­abling the busi­ness to hire more work­ers and make even higher prof­its. But the hir­ing spree ben­e­fits work­ers as well as busi­nesses: the in­creased de­mand for work­ers leads to higher wages for all.

Re­cent re­search by econ­o­mist Salim Furth con­cludes that mak­ing up the “lost” 8 per­cent of in­vest­ment per worker “would in­crease wages be­tween 13 per­cent and 20 per­cent” for all Amer­i­cans. That could be as much as a $10,000 raise for the typ­i­cal Amer­i­can fam­ily (me­dian an­nual wage ap­prox­i­mately $50,000 a year), that would mean a raise of $6,500-$10,000.

Com­pre­hen­sive cor­po­rate tax re­form — a pack­age that in­cludes both a lower tax rate and the im­me­di­ate write-off of cap­i­tal ex­penses — could in­crease Amer­i­can wages by even more than 20 per­cent, ac­cord­ing to some es­ti­mates.

Rid­ding the tax code of its cur­rent bias against in­vest­ment would un­leash a tor­rent of new in­vest­ment in Amer­i­can busi­nesses and Amer­i­can work­ers — and it’s the work­ers who pocket most of the prof­its.

A re­view of 10 separate eco­nomic stud­ies pub­lished be­tween 2007 and 2015 con­cluded that, when cor­po­rate taxes are cut, work­ers re­ceive al­most all of the ben­e­fit through higher wages. That’s be­cause more than 75 per­cent — and most likely the en­tire cost — of the high cor­po­rate in­come tax is be­ing passed on to work­ers in the form of lower wages. No won­der, then, that low­er­ing the rate and mak­ing Amer­ica a more at­trac­tive place to do busi­ness will ben­e­fit work­ers the most.

Ane­mic eco­nomic growth since the great re­ces­sion, the slug­gish rate of busi­ness star­tups, and re­duced en­trepreneur­ship — all are par­tially the re­sult of his­tor­i­cally low rates of U.S. in­vest­ment. Tax re­form can re­make Amer­ica into a top global des­ti­na­tion for busi­ness in­vest­ment, and a far more re­ward­ing work­place for Amer­i­can work­ers.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.