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Corporate Tax Cuts Could Hurt — Not Help — Workers

“[The President] is convinced the corporate rate is the only thing that really matters,” a senior Administration official told reporters about President Trump’s push to deeply cut the corporate tax rate as part of a tax plan.  The Administration claims that most of the benefits would flow to workers by raising their wages. Treasury Secretary Steven Mnuchin, for example, has repeatedly argued that the Administration’s “objective” for corporate tax cuts is boosting workers’ wages because, he says, “many, many economic studies show that more than 70 percent of the burden of corporate taxes are passed on to the workers.”  Our new paper explains why that’s misleading.

The bulk of the benefits from a corporate rate cut go to those at the top, the evidence indicates, with only a small share flowing to low- and moderate-income working families.  The Tax Policy Center (TPC) estimates about 70 percent of the benefit of a corporate rate cut flows to the top fifth of households — with one-third flowing to the top 1 percent alone (see first graph). 

That’s because:

  1. Only a modest share of corporate rate cuts flows to workers at any income level, including managers. TPC’s estimates incorporate a mainstream assumption that about 20 percent of the value of corporate rate cuts flows to workers (through assumed higher investment and, therefore, increased worker productivity and wages.) Similarly, the Congressional Budget Office, Joint Committee on Taxation, and Treasury’s Office of Tax Analysis all assess the empirical research as showing that only about a quarter or less of corporate taxes fall on workers, meaning that they would receive a quarter or less of the benefit of corporate tax cuts.
  2. Even the modest part of a corporate rate cut that would flow to workers is skewed to high earners such as highly compensated executives and professionals.  Workers’ share of corporate rate cuts is likely proportional to their share of total wage and salary income.  That income is concentrated among high earners such as highly paid executives, lawyers and other professionals, and the like.  Thus, only a small benefit would ultimately flow to struggling workers, who have been hurt most by slow wage growth in recent decades.

Further, corporate rate cuts — a key element of Speaker Paul Ryan’s “Better Way” plan and House Budget Committee Chairman Diane Black’s new budget plan, as well as the Trump tax plan could ultimately hurt the majority of Americans, depending on how they are paid for. If policymakers don’t offset the cost by raising taxes or cutting spending, the resulting increase in deficits would reduce national saving, meaning less capital would be available for investment in the economy and interest rates would rise. This would ultimately reverse any increase in investment caused by the rate cut, preventing productivity and workers’ wages from rising.

For corporate tax cuts to produce sustained wage gains for workers by increasing their productivity, policymakers must offset them with some combination of tax increases and spending cuts. But the offsets could reduce workers’ incomes by more than their increase in wages, unless they consisted largely or entirely of tax increases on high-income households.  Under reasonable illustrative assumptions about how policymakers could ultimately finance tax cuts, the bottom 80 percent of households would face average net tax increases or benefit reductions under Trump’s corporate rate cut proposal, while the top 1 percent would continue to receive large net tax cuts. (See second graph.)