Can Corporate Tax Cuts Boost American Workers' Wages?

There has been an ongoing debate about whether reducing corporate tax rates would significantly impact employee wages in the United States. Recent claims made by the President's Council of Economic Advisers (CEA) suggest that lowering the corporate tax rate to 20 percent could substantially increase average American workers' wages, ranging from a conservative estimate of $4,000 per year to a potentially higher figure of $9,000. However, this claim remains highly questionable when examined through the lens of actual economic data.

Theoretical vs. Real-World Data

According to the CEA's argument, slashing corporate tax rates could create more capital for businesses to invest in their workers, thereby increasing their wages. Yet, when we look at historical data, particularly from the United Kingdom, the results do not align with this optimistic view.

United Kingdom's Experience

The United Kingdom has significantly reduced its corporate tax rate from 30 percent to 19 percent over the past decade. During the same period, the United States maintained its corporate tax rate at 35 percent. Both countries have large open economies with diverse investor bases, ensuring that foreign investments are as welcome in the UK as they are in the US. Additionally, Britain offers a robust legal and regulatory environment, making it competitive on the global stage.

To evaluate the impact of these tax cuts, we can examine the trends in real median wages. The chart below highlights the difference between the UK and US experiences:

img src/path/to/chart altChart showing the relationship between UK corporate tax rates and real median wages

As the UK corporate tax rates decreased, real inflation-adjusted median wages also reduced. This counterintuitive relationship suggests that wage growth was negatively affected by the tax cuts. In contrast, the US experienced steady wage growth, albeit at a slower pace, even while maintaining a higher corporate tax rate.

2017 Tax Cuts and Jobs Act

Further complicating the picture is the 2017 Tax Cuts and Jobs Act, another of President Trump's key initiatives. This act includes provisions set to expire in 2025, encompassing not only corporate tax cuts but also individual income tax reductions and changes to the estate tax. The exact approach to these expirations remains uncertain, as both the former and current presidents have proposed different solutions.

Targeted Tax Breaks

The former President Trump has proposed a series of targeted tax breaks, such as eliminating federal taxes on tips, Social Security benefits, and overtime pay. These measures aim to provide direct financial relief to lower-income workers and better reflect their contributions to the economy.

Conclusion

The evidence suggests that corporate tax cuts may not necessarily lead to increased wages for American workers. The UK's experience provides a cautionary tale, showing that reductions in corporate tax rates do not automatically translate to higher wages for workers. As policymakers consider future tax policies, it is crucial to prioritize measures that directly support wage growth and enhance the wellbeing of American workers.

To improve the overall economic condition and specifically the wage growth of American workers, a multifaceted approach is needed, combining prudent tax policies with robust investment in education, infrastructure, and social safety nets. This comprehensive strategy can help create a more equitable and prosperous future for all workers in the United States.