By far, the most important part of the proposed tax cut being considered by Congressional Republicans is the 40 percent reduction in the corporate income tax cut – from a rate of 35 to 21 percent. And yet, the tax bill is being touted by President Donald Trump and Republican Congressional leaders as a great big tax cut for middle-class Americans.
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Corporate income tax cut – The Latest Proposal and what it means
On Wednesday, December 13th, President Trump recalled that, “As a candidate, I promised we would pass a massive tax cut for everyday working Americans families…” The only problem is that the corporate income tax cut, the lowering of the top rate of the personal income tax from 39.6 to 37 percent and some of the other proposed tax cuts, will not lower the taxes of these families. But they certainly will provide a massive tax cut to the rich and the near-rich.
That said, the huge cut in the corporate income tax will, somewhat indirectly, be beneficial to tens of millions of American middle and working-class families. And perhaps even more importantly, it will be beneficial to our economy.
As has been widely reported, because large American corporations will be retain much more of their profits, they will be able to substantially raise the wages of their employees. The big question is: By how much?
In recent years corporate profits have soared, but the inflation-adjusted wages of most Americans have remained about the same. Still, it is not unreasonable to believe that if the taxes on these profits were reduced, some of this largesse would be shared with employees.
Our experience since the end of World War II can serve as a guide. Between the late 1940s and the mid-1970s, inflation-adjusted hourly wages doubled for most American workers. But since then, the inflation-adjusted hourly wage rate has remained about the same.
What happened was that the cost of employer-paid medical insurance went through the roof. As a result, virtually all the increases in employee compensation went to pay rapidly rising insurance premiums.
Since the mid-1970s, the rising cost of employer-paid healthcare was passed on to employees. And as a result, wages stagnated.
Now let’s speculate about the effect on wages of a large cut in corporate income taxes. One might expect that some of that windfall would be passed on to employees. But again, the big question is: How much?
There are two other very important effects of the corporate income tax cut that should be considered. First, it will surely make the American goods and services much more competitive in global markets, resulting in economic expansion and the creation of more jobs.
A second effect will be the reduction of our half-trillion-dollar annual foreign trade deficit. Because this is money that we owe to foreigners. In the long run it is much more serious than our somewhat larger annual federal budget deficit.
Will a huge corporate income tax reduction provide a windfall to the rich, who own most of the corporate stock? Of course! But will it also raise wages – how much we don’t know – and be beneficial to our economy? Again, the answer is “yes.”
So, to sum up: this tax cut is not all good, it’s not all bad, and it’s not entirely ugly. It’s all of the above.
About the Author
Steve Slavin has a PhD in economics from NYU. He taught for over thirty years at Brooklyn College, New York Institute of Technology, and New Jersey’s Union County College. He has written sixteen math and economics books including a widely used introductory economics textbook now in its eleventh edition (McGraw-Hill) and The Great American Economy (Prometheus Books) which was published in August.