Will Corporate Tax Cuts Cause a Large Increase in Wages?

William Cline

No PB17-30, Policy Briefs from Peterson Institute for International Economics

Abstract: Proponents of lowering corporate taxes cite an estimate by the Trump administration’s Council of Economic Advisers (CEA) that cutting the corporate tax rate from 35 to 20 percent would raise average annual household income by $4,000 to $9,000, corresponding to an increase in wages ranging from 6 to 14 percent, respectively. The council’s conclusion is based on cross-country and cross-state statistical tests and are subject to weaknesses highlighted by Lawrence Summers and Jason Furman, among others. In contrast, Gregory Mankiw has pointed out that a simple aggregate production function approach could generate wage increases that substantially exceed the tax revenue loss. This Policy Brief examines the use of the production function approach and concludes that although Mankiw provides a useful reminder that a corporate tax cut could raise worker productivity and wages through its potential for providing more capital for labor to work with, the likely magnitudes of the gains are far smaller than the range claimed by the CEA.

Date: 2017-11
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