Tax Cuts Must Be Judged by Their Effect on Typical Households

The Washington Center for Equitable Growth’s Greg Leiserson provides must-read guides to assess the economic impacts of the 2017 tax law in a new paper and associated op-ed. He makes the following important points:

1. The tax cuts’ success should be judged by how much better off they make the typical American, not by how much they affect economic growth. Ultimately, the broad public’s well-being is what matters most for assessing the tax cut law, Leiserson argues. Even if core parts of the law, such as the deep and costly tax cuts for profitable corporations, stimulate economic growth, the typical American would see few benefits if that growth largely produces higher incomes for wealthy shareholders (both domestic and foreign) and high-paid executives but little or nothing for ordinary workers. Indeed, as noted below, these workers would end up worse off if they bear the brunt of program cuts that policymakers enact to address the fiscal cost of the tax cuts.
2. To be judged successful, the tax cuts must produce higher wages for the typical worker. Ultimately, lawmakers’ promise that corporate tax cuts will benefit ordinary workers will occur only if the cuts raise workers’ wages significantly. That means, according to conventional wisdom, that: (1) the tax cuts need to encourage businesses to make new investments that raise workers’ productivity; and (2) most of those productivity gains are passed on to workers in the form of higher wages. Assessing whether workers’ wage rates rise above what they would have been without the tax law will take time. But Leiserson says there’s little reason to believe that the tax cut gains will ultimately shift from shareholders to workers.

   Leiserson estimates that wage rates (including benefits) would need to rise about 1 percent above what they otherwise would have been to ensure that the corporate tax cut benefits flow to workers, not shareholders. Mainstream estimates such as by the Tax Policy Center and Congressional Budget Office, however, suggest that the actual wage rate increases will range from near zero to one-third of 1 percent. Meanwhile, the 5 to 11 percent wage gain increases that the White House Council of Economic Advisers predicts are not backed by historical experience, he notes.

   But, for the short run, one thing is clear, according to Leiserson: “[E]very month in which wage rates are not sharply higher than they would have been absent the legislation…is a month in which the benefits of those corporate tax cuts accrue primarily to shareholders.”

3. The tax law produces large revenue losses under any plausible growth estimates, and who bears the costs of policies to offset those losses matters a great deal for the welfare of typical households. Academic research and estimates from nonpartisan sources based on that research indicate that even with modest growth, the tax law will add substantially to revenue losses and budget deficits, Leiserson notes.

   How typical workers and households fare from the law will largely depend on whether policymakers address the deficits through cuts to programs that help families afford the basics like health care and nutrition or by squeezing investments with widely shared benefits.

   Indeed, if Republican lawmakers follow through with the program cuts that they’ve already proposed, most households would be net losers from the tax law, while only the highest-income households would be better off.