Confusion On Profits, Wages, And Taxes At The White House

The White House is pushing the line that their proposed cut to corporate tax rates will lead to an increase in average household income of more than $4,000.

“Reducing the statutory federal corporate tax rate from 35 to 20 percent would, the analysis below suggests, increase average household income in the United States by, very conservatively, $4,000 annually. The increases recur each year, and the estimated total value of corporate tax reform for the average U.S. household is therefore substantially higher than $4,000. Moreover, the broad range of results in the literature suggests that over a decade, this effect could be much larger.”

This is a pretty impressive claim, but it gets even better a couple of pages later:

“When we use the more optimistic estimates from the literature, wage boosts are over $9,000 for the average U.S. household.”

There are few things worth pointing out about the White House’s claims here. First, the idea that workers would see large gains from a reduction in corporate income tax rates is not based on the idea that lower taxes will be directly passed on in wages. The amount of tax at stake is far too small to have the sort of impact on wages claimed here.

Rather the implication is that there would be a huge burst of investment leading to a huge increase in productivity and growth. The higher levels of productivity would be passed on to workers in the form of higher wages.

To get an idea of the size of this burst, the $4,000 figure is just under a 5 percent boost in income, whereas the $9,000 figure is more than an 11 percent increase. This means we need to see an increment to growth of roughly this amount over the near future, presumably the next four to five years.[1] This means we’re talking about adding more than a percentage point to the annual growth rate in their less optimistic scenario and more than two percentage points in their high-end estimate. We have never seen anything like this from a change in tax policy – but hey anything can happen.