Corp. Tax Cut Would Boost Incomes, White House Says -- Update

By Richard Rubin Features Dow Jones Newswires

Cutting the U.S. corporate tax rate to 20% from 35% would, "very conservatively," boost average household income by $4,000 a year, White House economists said in a report released Monday.

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The study, which comes as the tax-policy debate heats up in Congress, stakes its argument on the idea that corporate taxes hurt workers by inhibiting capital investment, hiring and wage growth.

"There's lots of evidence that wages respond to changes in corporate taxes," Kevin Hassett, chairman of the White House Council of Economic Advisers, told reporters Sunday.

Many economists, however, say a corporate-tax cut would mostly benefit shareholders, not workers.

The $4,000 wage increase would occur over a few years as companies invest more in the U.S., boosting productivity and then wages, Mr. Hassett said. That would be on top of average household income -- or the total income divided by the number of households -- of about $83,000. The pay gain for the $53,000-a-year median household, which is the level at which half of households earn more and half earn less, would be closer to $3,000.

The administration is essentially arguing that cutting the corporate-tax rate is so powerful that the wage gains could be larger than any forgone tax revenue, though the outcome would depend on other factors. This suggests that most gains to workers come through a larger economy. The report doesn't address possible countervailing forces, such as whether financing a tax cut with budget deficits would crowd out private investment and drive up interest rates.

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Democrats argued that the administration's forecast was far too rosy in assuming that companies won't just pass tax cuts along to their shareholders.

"History shows tax cuts like these benefit the wealthy and the powerful to the exclusion of the middle class," said Sen. Chuck Schumer (D., N.Y.), the Senate minority leader. "As the president likes to point out, the stock market is at record highs and companies are raking in unprecedented profits, yet wages have remained relatively flat."

The White House report's minimum estimates stem from a 2009 study by an economist at the Federal Reserve Bank of Kansas City of variations in state corporate tax rates and their connection to wage differences. A subsequent Congressional Budget Office analysis said those cross-state studies are "probably not indicative" of federal tax changes.

The White House report looks only at the corporate-tax rate cut being considered by Congress and not at other changes that are part of the GOP plans, such as removing tax breaks or limiting interest deductions for businesses. The U.S. has the highest statutory corporate-tax rate of major countries, though the effective tax rate is closer to the middle of the pack due to various breaks.

"If there were lots of other changes that we haven't modeled that worked in the other direction, then these models would change," Mr. Hassett said.

Mr. Hassett added that there wasn't enough information yet about the entire tax plan's effects on companies and individuals for a complete economic estimate. GOP lawmakers don't plan to release a bill for several weeks, and crucial planks of the proposal are still vague.

Mr. Hassett and Republicans have complained when other, more critical, analyses of GOP tax plans relied on assumptions about details that haven't been decided.

Economists generally believe the corporate-tax burden falls on both shareholders and on workers. CBO, the Joint Committee on Taxation and the staff of the U.S. Treasury Department all say most of the burden falls on owners of capital, meaning investors, not workers, would get much of the benefit of a corporate-tax cut. Mr. Hassett cited other studies that put half or more of the tax burden on workers.

Mr. Hassett and Treasury Secretary Steven Mnuchin have contested the Treasury Department's findings, and Treasury removed its own study from its website, calling it dated. Mr. Hassett pointed to data showing that the 10 countries with the lowest corporate-tax rates among developed economies had faster wage growth in recent years than those with the highest corporate rates.

The new report sets out wage stagnation as the problem it is trying to solve, then works to justify a tax cut that isn't directly aimed at solving it, said Juan Carlos Suárez Serrato, an economics professor at Duke University. Other, more focused changes might include an expansion of the earned-income tax credit or job training, he suggested.

"Even if you wanted to help workers by giving them $4,000 income, it's not clear that the best way to do that" is to also cut taxes for owners of capital, he said.

The report also says that cutting the corporate-tax rate would increase wages by reducing incentives for companies to engage in profit shifting, the practice by which they book income in low-tax foreign countries instead of in the U.S.

It isn't clear whether that would have a considerable effect. Shifted profits often stem from the transfer of intellectual property rights, rather than jobs, to U.S. companies' foreign subsidiaries. Those rights are then used to generate low-tax profits outside the U.S.

Write to Richard Rubin at richard.rubin@wsj.com

(END) Dow Jones Newswires

October 16, 2017 16:07 ET (20:07 GMT)