The historical record and data are clear and unequivocal, tax cuts in the industrialized world (proxy is the OECD) have led to increased incomes for workers across the world. Sorry guys, supply side economics works and it works in every country. The only debate amongst economists is how much American worker pay will increase. From as low as $1,000/year to as high as $9,000/year. The smart money is in the $3,000-5,000 range.
The Wages of Corporate Taxes
Kevin Hassett earns the wrath of the left by showing how tax rate cuts will help workers.
Kevin Hassett, chairman of the Council of Economic Advisers, at a Senate Banking Committee nomination hearing in Washington, June 6. PHOTO: ANDREW HARRER/BLOOMBERG NEWS
By
The Editorial Board
Oct. 23, 2017 6:52 p.m. ET
542 COMMENTS
What do left-of-center economists have against a tax cut that would raise wages for American workers? They’re always telling us that America needs a raise, and that labor isn’t capturing enough of corporate profits, yet along come Republicans promising to raise wages by encouraging more investment in the U.S., and they react with shock and smears.
That’s the only way to describe the remarkable attack on economist Kevin Hassett for marshaling the considerable economic evidence that cutting the corporate tax rate to 20% from 35% will benefit workers. Mr. Hassett is an expert in this field, having done his own research over the years, and now he is chairman of the White House Council of Economic Advisers.
Mr. Hassett didn’t start this fight. But he felt obliged to respond to the recent political assault on tax reform by the Tax Policy Center. The TPC, which fancies itself nonpartisan but has a record of opposing every Republican tax reform, assailed the Trump-Congress tax policy framework by inventing details that don’t exist. So on Oct. 5 Mr. Hassett responded in a speech at the TPC.
It was “scientifically indefensible,” Mr. Hassett said, for the TPC to assert that there would be little growth from the proposed reform. The static analysis, Mr. Hassett added, was “based on many fictions.” And by promoting its attack before the final details were known, the TPC had behaved “irresponsibly” and undermined hopes for “bipartisan cooperation.”
In speaking so forthrightly, Mr. Hassett unleashed the furies. Not only was he wrong, thundered former Treasury Secretary Larry Summers, the plan he defended is “an atrocity,” a combination of “ignorant, disingenuous and dishonest.” The Summers-ettes in the economic press corps all kicked in unison, and Sen. Chuck Schumer called it “fake math.”
***
There is a long and legitimate debate about who pays corporate taxes. Corporations essentially collect taxes that are ultimately paid by someone else: a combination of workers in lower wages, customers in higher prices, or shareholders in lower after-tax returns.
For many years the dominant belief was that shareholders bore the biggest burden, but this has changed in recent decades with new research on the impact of capital mobility in a global economy. While labor is relatively immobile, especially across national borders, capital can go whereever it wants with relative ease.
U.S. companies have taken advantage of this reality by investing more abroad in lower-tax countries. The benefits accrue to Irish or Singaporean workers whose jobs are created by that capital investment. In his speech at the TPC, Mr. Hassett noted that in 1989 the average statutory corporate tax rate in the OECD was 43%—compared with 39% for the U.S. Today the average corporate tax rate for the Organization of Economic Cooperation and Development—a proxy for the industrialized world—is 24%.
Yet the combined average U.S. federal and state rate is still 39%. By making the U.S. rate competitive in a global market, capital will flow back to the U.S. for new investment. Much of that investment will go to increase worker productivity, which would boost wages.
What really angers the liberals is that, in a paper released this month by the White House, Mr. Hassett collected years of economic evidence to make the case that cutting the U.S. rate to 20% would raise average wages by $4,000 to perhaps more than $9,000. Outrageous, says Mr. Summers.
But Mr. Hassett isn’t alone. Economist Laurence Kotlikoff wrote on these pages last week that the GOP framework would “raise real wages by 4% to 7%, which translates into roughly $3,500 a year for the average working household.” Other economists have found the increase closer to $1,000. Still others say it’s higher, but the debate is over the magnitude of the raise, not the fact that American workers will benefit if the U.S. cost of capital falls.
In their blogs, economists Casey Mulligan of the University of Chicago and Greg Mankiw of Harvard dissect Mr. Summers’ academic arguments in rigorous detail, and Mr. Mulligan does him the service of citing some of his earlier work. In a 1981 paper Mr. Summers referred to “the increase in gross wages which results from the increased capital intensity arising from eliminating capital taxation.”
In his response, Mr. Summers has grabbed for the lifeline that a small economy like Ireland has no relevance to America and that Britain saw no increase in wages after it cut the corporate tax rate. But the corporate tax rate isn’t the only factor in the cost of capital, and the U.K. partially offset the benefit of the rate cut with other tax changes. And until Brexit, the U.K. economy was still one of the strongest in Europe.
Other large economies are also cutting their corporate rates, and Emmanuel Macron wants to cut the French rate to 25% from 33%. In his paper Mr. Hassett points out that wage growth has been far greater since 2013 in the 10 developed countries with the lowest statutory tax rate compared with those with the highest.
***
Which brings us back to why Mr. Summers and his followers are so upset now. Our guess is that it has something to do with the disastrous record of their own policies in lifting wages. Mr. Hassett had the audacity to point out that real corporate profits rose 11% a year under President Obama, but “the pass-through to workers” was only 0.3%.
The Summers crowd that preaches about the dangers of inequality presided over an economy that increased it. Obamanomics was great for Wall Street, not for the American middle class. How dare conservatives try to do better—and with policies that look to increase supply-side incentives rather than by redistributing income, fixing prices and regulating business to the point that capital investment has been historically weak.
If we presided over that liberal record, we’d be sore, too. But if they look in the mirror with some honesty, they might understand that the failure of their policies in lifting wages is one reason Donald Trump is President. Meanwhile, why begrudge Americans a raise?
Appeared in the October 24, 2017, print edition.
The Wages of Corporate Taxes
Kevin Hassett earns the wrath of the left by showing how tax rate cuts will help workers.
Kevin Hassett, chairman of the Council of Economic Advisers, at a Senate Banking Committee nomination hearing in Washington, June 6. PHOTO: ANDREW HARRER/BLOOMBERG NEWS
By
The Editorial Board
Oct. 23, 2017 6:52 p.m. ET
542 COMMENTS
What do left-of-center economists have against a tax cut that would raise wages for American workers? They’re always telling us that America needs a raise, and that labor isn’t capturing enough of corporate profits, yet along come Republicans promising to raise wages by encouraging more investment in the U.S., and they react with shock and smears.
That’s the only way to describe the remarkable attack on economist Kevin Hassett for marshaling the considerable economic evidence that cutting the corporate tax rate to 20% from 35% will benefit workers. Mr. Hassett is an expert in this field, having done his own research over the years, and now he is chairman of the White House Council of Economic Advisers.
Mr. Hassett didn’t start this fight. But he felt obliged to respond to the recent political assault on tax reform by the Tax Policy Center. The TPC, which fancies itself nonpartisan but has a record of opposing every Republican tax reform, assailed the Trump-Congress tax policy framework by inventing details that don’t exist. So on Oct. 5 Mr. Hassett responded in a speech at the TPC.
It was “scientifically indefensible,” Mr. Hassett said, for the TPC to assert that there would be little growth from the proposed reform. The static analysis, Mr. Hassett added, was “based on many fictions.” And by promoting its attack before the final details were known, the TPC had behaved “irresponsibly” and undermined hopes for “bipartisan cooperation.”
In speaking so forthrightly, Mr. Hassett unleashed the furies. Not only was he wrong, thundered former Treasury Secretary Larry Summers, the plan he defended is “an atrocity,” a combination of “ignorant, disingenuous and dishonest.” The Summers-ettes in the economic press corps all kicked in unison, and Sen. Chuck Schumer called it “fake math.”
***
There is a long and legitimate debate about who pays corporate taxes. Corporations essentially collect taxes that are ultimately paid by someone else: a combination of workers in lower wages, customers in higher prices, or shareholders in lower after-tax returns.
For many years the dominant belief was that shareholders bore the biggest burden, but this has changed in recent decades with new research on the impact of capital mobility in a global economy. While labor is relatively immobile, especially across national borders, capital can go whereever it wants with relative ease.
U.S. companies have taken advantage of this reality by investing more abroad in lower-tax countries. The benefits accrue to Irish or Singaporean workers whose jobs are created by that capital investment. In his speech at the TPC, Mr. Hassett noted that in 1989 the average statutory corporate tax rate in the OECD was 43%—compared with 39% for the U.S. Today the average corporate tax rate for the Organization of Economic Cooperation and Development—a proxy for the industrialized world—is 24%.
Yet the combined average U.S. federal and state rate is still 39%. By making the U.S. rate competitive in a global market, capital will flow back to the U.S. for new investment. Much of that investment will go to increase worker productivity, which would boost wages.
What really angers the liberals is that, in a paper released this month by the White House, Mr. Hassett collected years of economic evidence to make the case that cutting the U.S. rate to 20% would raise average wages by $4,000 to perhaps more than $9,000. Outrageous, says Mr. Summers.
But Mr. Hassett isn’t alone. Economist Laurence Kotlikoff wrote on these pages last week that the GOP framework would “raise real wages by 4% to 7%, which translates into roughly $3,500 a year for the average working household.” Other economists have found the increase closer to $1,000. Still others say it’s higher, but the debate is over the magnitude of the raise, not the fact that American workers will benefit if the U.S. cost of capital falls.
In their blogs, economists Casey Mulligan of the University of Chicago and Greg Mankiw of Harvard dissect Mr. Summers’ academic arguments in rigorous detail, and Mr. Mulligan does him the service of citing some of his earlier work. In a 1981 paper Mr. Summers referred to “the increase in gross wages which results from the increased capital intensity arising from eliminating capital taxation.”
In his response, Mr. Summers has grabbed for the lifeline that a small economy like Ireland has no relevance to America and that Britain saw no increase in wages after it cut the corporate tax rate. But the corporate tax rate isn’t the only factor in the cost of capital, and the U.K. partially offset the benefit of the rate cut with other tax changes. And until Brexit, the U.K. economy was still one of the strongest in Europe.
Other large economies are also cutting their corporate rates, and Emmanuel Macron wants to cut the French rate to 25% from 33%. In his paper Mr. Hassett points out that wage growth has been far greater since 2013 in the 10 developed countries with the lowest statutory tax rate compared with those with the highest.
***
Which brings us back to why Mr. Summers and his followers are so upset now. Our guess is that it has something to do with the disastrous record of their own policies in lifting wages. Mr. Hassett had the audacity to point out that real corporate profits rose 11% a year under President Obama, but “the pass-through to workers” was only 0.3%.
The Summers crowd that preaches about the dangers of inequality presided over an economy that increased it. Obamanomics was great for Wall Street, not for the American middle class. How dare conservatives try to do better—and with policies that look to increase supply-side incentives rather than by redistributing income, fixing prices and regulating business to the point that capital investment has been historically weak.
If we presided over that liberal record, we’d be sore, too. But if they look in the mirror with some honesty, they might understand that the failure of their policies in lifting wages is one reason Donald Trump is President. Meanwhile, why begrudge Americans a raise?
Appeared in the October 24, 2017, print edition.
