Don’t count on raise under Trump plan
President Donald Trump and his Republican allies face a basic problem as they try to build public support for a cut in corporate taxes: Most Americans think big businesses pay too little in taxes, not too much. So the president and his staff decided to rebrand the proposal. Don’t think of it as a tax cut for corporations, they argue; think of it as a pay increase for ordinary workers.
“The average American family would get a $4,000 raise under the President’s tax cut plan,” Trump’s spokeswoman, Sarah Huckabee Sanders, said on Twitter. “How could any member of Congress be against it?”
Trump, ever the promoter, couldn’t resist increasing the number. “It can be $5,000 average per individual—per group,” he said in a television interview. (He apparently meant per household.)
All those numbers are inflated at best, and largely made up at worst. Although most economists agree that a corporate tax cut can help boost economic growth, there’s no guarantee; too many other factors can intervene. It’s even less clear that lower corporate taxes will automatically produce higher wages. The theory isn’t that corporations will share tax cuts with workers. It’s that tax cuts will induce businesses to invest more in the United States, that investment will lead to greater productivity, and that productivity growth will naturally result in higher incomes.
Much of this debate may be moot, since Trump is making it difficult for Congress to pass any tax bill at all.
But as we’ve seen over the last decade, the link between productivity and income growth doesn’t seem to be functional any more. It’s quite possible for corporations to earn record profits without wages growing at all.
That reality didn’t stop Kevin Hassett, the chairman of Trump’s Council of Economic Advisers, from issuing a bullish estimate about the impact of the president’s proposed reduction of the top corporate tax rate from 35 percent to 20 percent.
“I would expect to see an immediate jump in wage growth,” Hassett told reporters last week. “I would expect capital spending to really take off.”
He said his estimate of a $4,000 raise was “very conservative,” that the increase could be as high as $9,000, and that it wouldn’t be a one-time event; it would recur, he promised, year after year.
Sound implausible? Maybe that’s why few other economists stepped up to endorse his numbers, and so many jumped up to dispute them—in some cases, hotly.
“It is some combination of dishonest, incompetent and absurd,” wrote Lawrence Summers, who was Treasury secretary under President Clinton. If Hassett were one of his students, he said, “I would be hard pressed to give (him) a passing grade.”
Summers said Hassett’s estimates of the benefit to workers from a corporate tax cut were vastly exaggerated. “Most of the benefits go to corporate shareholders, who have high incomes,” he said.
Others were milder, but still dismissive.
Hassett’s projections “are way too high and not well-justified,” William G. Gale, co-director of the nonpartisan Tax Policy Center, said Tuesday. He said the Trump tax cut could produce an increase of about $400 in average household income, a long way from $4,000.
And it wouldn’t be immediate. “It is a long-term effect,” said Gale, who was an advisor to President George H.W. Bush. “The adjustment to a corporate tax will take time.”
Goldman Sachs, the investment bank that provided Trump with some of his top economic advisors, sounds skeptical too.
“The research literature appears to suggest that tax cuts can have modestly positive supply side effects, though some studies find no effect,” the firm said in a report this month.
Not only are the White House estimates controversial, but Hassett and other Trump aides also are already overselling them. Down in the fine print, Hassett notes that a household in the middle of the income distribution—the median American family—would see its income increase by $3,000, not $4,000. (The $4,000 figure applies to “average household income,” but that number is distorted by the giant incomes of the top 1 percent. In 2016, the median household earned income of about $59,000, but average household income was about $83,000.)
Despite his promise that a tax cut would produce an “immediate” jump in wages, Hassett also acknowledged to reporters that it might take several years. And he’s assuming, optimistically, that the economy won’t suffer a downturn soon. (Historically, the U.S. has seen a recession every eight to 10 years; the current recovery is—gulp—now in year nine.) But Hassett is an incorrigible optimist. In 2000, he coauthored a book titled “Dow 36,000” that predicted a meteoric stock market rise. The market promptly fell to 11,000.
Much of this debate may be moot, since Trump is making it difficult for Congress to pass any tax bill at all. On Monday, he said he would oppose any change to 401(k) retirement plans, an idea Republican leaders were considering to pay for some of their tax cuts. On Tuesday, he attacked Tennessee Sen. Bob Corker, one of the Republicans he will need to get a tax bill through the Senate. And the week isn’t over. So don’t count on that $4,000 raise—or the $3,000 version either.