Since the signing of the 2017 Tax Cuts and Jobs Act, certain observers have criticized the lowering of the corporate tax, depicting it as a “gift for the rich.” Such assertions quite simply ignore the recent research in economics—and those who are eager to cite the social-democratic countries in Northern Europe as a model have not drawn the appropriate lessons from their experience in the matter.
As many economists have pointed out for decades, the corporate tax rate affects the business environment: the general level of economic growth, investment, and entrepreneurial activity. But recent studies have also shown how ultimately, at a micro-level, corporate taxes affect the incentives of economic actors. Specifically, they raise the cost of capital, which in turn restrains the growth of productivity. It is ultimately only through investment in productivity-improving technology that real wages grow, and so employees are the ones who end up paying a large portion of the price for high corporate tax rates.
An American Enterprise Institute study looking at 72 countries over 22 years found that workers’ wages are not responsive to income tax rates, but rather to the corporate tax rate. A 1 percent increase in the corporate tax rate leads to a 1 percent decrease in wage rates. A forthcoming paper to be published in the American Economic Review focusing on the German case agrees, finding that workers shoulder fully half of the corporate tax burden, and demonstrating that low-skilled workers, women and young workers are the ones who suffer the most.
In contrast, tax cuts lower the tax liability, which reduces the cost of capital, thereby stimulating investment, increasing the number of local jobs available, and also raising the productivity of workers and so eventually their wages. In other words, cutting corporate taxes constitutes an indirect way of raising workers’ wages. A recent study calculated that in the United States between 1980 and 2010, a 1 percent cut in the state corporate tax rate increased real wages by 1.1 percent in the long run.
It’s too early to assess the long-term impact of the recent federal corporate tax cuts. However, it seems that the first effects can already be seen, as some companies in certain sectors have already started to give their employees bonuses and pay hikes following the cuts, including big employers like AT&T. Indeed, the world’s largest employer, Walmart, has just announced that as a direct consequence of the tax cuts, it is increasing its starting salary for U.S. workers from $9 to $11 an hour, and expanding parental leave benefits as well.
Opponents of these cuts who simplistically call them “a Christmas present for big business and the rich” are therefore obviously aiming at the wrong target. If you want to “eat the rich,” a more intelligent and efficient way to go about it is through an increase in the personal income tax and/or an increase in the level of taxes on estates of more than $1 million. For the record, I am not, I repeat, not in favor of these two measures, for other reasons. I am simply stating that if eating the rich is your thing, then high corporate taxes are not the most efficient way to go about it.
This economic fact has been understood by the social democracies of northern Europe, which are regularly held up as poster children for high taxes by the likes of Bernie Sanders. These social-democratic countries were able to bring down their corporate tax rates to between 20 and 24 percent, which is just below the OECD average (prior to the Trump reform). They did so before the United States, which until very recently had the highest level among OECD countries.
Finland and Sweden cut their corporate tax rates by half within a few years, mostly at the beginning of the 1990s. This does not prevent these countries from taxing the rich in other ways and implementing redistributive policies. They simply do so in less economically harmful ways.
The evidence is clear: Even those who favor a heavy-handed redistribution of wealth through government intervention shouldn’t oppose corporate tax cuts, since it is ultimately average workers who foot a large part of the bill for those taxes.
It’s true that this leaves other portions of the tax package recently signed into law by President Trump open for debate. But when it comes to corporate tax cuts specifically, they should get three cheers from anyone who has the best interests of workers at heart.
Michel Kelly-Gagnon is President and CEO of the Montreal Economic Institute. The views reflected in this op-ed are his own.
Read more articles on the theme of Taxation.