In his first concerted sales pitch for tax reform during a speech in Missouri on Wednesday, President Trump promised that tax cuts for businesses would mean a better life for the middle class.
“Lower taxes on American business means higher wages for American workers. And it means more products made right here in the U.S.A.,” Trump said.
You’ll likely hear that argument frequently in the coming weeks as the Trump administration tries to sell the benefits of tax reform for the average American. Here’s a brief explanation of the issue.
The pitch: Corporate tax cuts will be great for the middle class.
The theory: If Congress cuts corporate tax rates and reforms business taxes, that will boost investment in the United States — and that, in turn, will create jobs and boost wages.
The reality: It’s a definite maybe. But even if benefits occur for the middle class, they may not be as great or as immediate as promised.
The economic debate: Economists and tax policy experts seem to agree that workers bear some of the burden of corporate taxes. The idea is this: the more tax companies pay, the fewer jobs they create and the lower their wages.
The question is how much of the tax burden is borne by workers. It’s a matter of debate.
Treasury Secretary Steven Mnuchin’s frequent assertions that workers bear 70% to 80% of the corporate tax burden are at the high end of estimates.
The Joint Committee on Taxation, the nonpartisan congressional brain trust behind tax policy, estimates that workers bear only 25%.
And the Treasury Department’s own Office of Tax Analysis in 2015, under President Obama, put the number even lower, at just 19%.
Other factors: Time and magnitude may affect whether a corporate tax cut helps workers.
Any benefits could take years to be fully realized. The JCT measures the effects over a decade. Of course, a lot of other things can happen in the economy or in an industry in the intervening years that undercut those potential benefits.
And the benefits may never be realized if lawmakers simply pass a temporary tax cut for a few years, since temporary tax cuts are not considered good for sustained growth.
How low the new rate would be is also a factor. If it’s not significantly lower relative to other countries, it’s unlikely to be very competitive, muting its potential to boost investment and the U.S. economy.
Arguments why a corporate tax cut won’t help — and may even hurt — the middle class: U.S. corporate profits today are very high and corporations are already sitting on nearly $2 trillion in cash here and abroad. Yet wages and job creation haven’t gone up much.
The counterargument to the administration’s push is, what’s to say a big tax cut now would make a difference — especially if a lot of the money from those tax cuts gets distributed to shareholders in the early years?
What’s more, since it will be politically difficult to agree on ways to offset the costs of tax cuts, there’s a fair chance they will be financed through government borrowing. That is to say, they’ll increase deficits. If that happens, Democrats say, conservatives are likely to use that increased debt as a reason to call for even deeper spending cuts to programs critical to low- and middle-income families.
