The President’s Council of Economic Advisers claims that slashing the corporate tax rate to 20 percent would boost the average American’s wages by $4,000 per year (“very conservatively”) — and perhaps by as much as $9,000. If true, that would be a remarkable gain for working Americans. Unfortunately, it’s extraordinarily unlikely to be true. The two of us can think of dozens of objections to the CEA claim, presented in an official report, but perhaps the place to start is with the United Kingdom, which has already run this experiment. Over the past decade, the United Kingdom has slashed its corporate tax rate, in several steps, from 30 percent down to 19 percent. At the same time, the United States has kept its corporate tax rate constant at 35 percent. Like the United States, Britain has a large open economy, investors in British firms come from all over the world, and Britain provides a sound legal and regulatory environment.They next document the decline in real median wages in the UK since the UK began its experiment with lower corporate tax rates. They then note:
Of course, the UK example is just one case, but this comparison is a great deal more relevant to the CEA’s claims than the slapdash comparison it presents near the start of its report. The report compares US wage growth over three years to wage growth in 10 unnamed “low-tax” developed economies. But the United States is simply not comparable to small-economy tax havens like Ireland and Switzerland. What’s more, the CEA comparison focuses on average wage growth, while our chart uses median wages.Their critiques of what the CEA under Kevin Hassett continue. But let’s stick to the idea of using the experiences of other nations who have also reduced corporate profits taxes. KPMG provides corporate profits by nation over the 2003 to 2017 period. Other nations have followed the UK lead. For example, Japan’s rate has been lowered from 42% to less than 31%. One has to ask why didn’t the CEA do comparisons based on nations like Japan and the UK. Update: This CEA report touts Figure 1:
the covariation between the trajectory of inflation-adjusted wages and statutory corporate tax rates (Federal and sub-Federal) between the most-taxed and least-taxed developed countries (OECD) over recent years, visible in Figure 1, is indicative of these papers’ findings. Between 2012 and 2016, the 10 lowest corporate tax countries of the OECD had corporate tax rates 13.9 percentage points lower than the 10 highest corporate tax countries, about the same scale as the reduction currently under consideration in the U.S. The average wage growth in the low tax countries has been dramatically higherFigure 1 shows the average real wage growth from 2013 to 2016. A lot of these nations have had low corporate tax rates for years so why only show the latest four years? And the term “dramactically” strikes me as hyperbole. One also has to ask what role does transfer pricing abuse play into the measured series? I get what Kimberly Clausing and Edward Kleinbard meant by:
Of course, the UK example is just one case, but this comparison is a great deal more relevant to the CEA’s claims than the slapdash comparison it presents near the start of its report. The report compares US wage growth over three years to wage growth in 10 unnamed “low-tax” developed economies. But the United States is simply not comparable to small-economy tax havens like Ireland and Switzerland.