Corporate tax cut the swift and blunt way. @RichardAEpstein @HooverInst

Nov 10, 2017, 01:52 AM

11-09-2017 (Photo:File:Schurz and Sumner Cooking.png ) Twitter: @BatchelorShow

Corporate tax cut the swift and blunt way. @RichardAEpstein @HooverInst

One obvious point in favor of the Trump administration’s position on corporate tax rates is that the United States has lagged in the international tax derby; its 35 percent corporate rate is far higher than the rates of its major competitors, which are on average between 10 and 22.5 percent lower. Those hefty rate differentials have sent many American corporations overseas, while inducing foreign investors to decrease their stakes in the American market. Corporate financiers are experts at calculating internal rates of return, making it highly unlikely that tax breaks of this magnitude will not alter their behavior. The hard question is not whether tax cuts will stimulate activity, but, empirically, what the size of that response will be.

To answer that question, the Trump administration’s white paper offers an econometric approach that compares the growth levels in foreign nations with high and low tax rates, where the gap in the tax rates between the two groups was close to 14 percent. In line with standard theory, it reports that lower taxes led to high rates of wage growth by about 4 percent, distributed across all wage levels, compared to a 1 percent wage growth rate for high tax countries, controlling for extraneous variables. The predictable inference from this data is that some portion, perhaps even more than half, of the money saved through tax reductions are passed back from the owners of capital to wage earners.

The same conclusion, the white paper argues, is reached by determining the elasticity (e.g. sensitivity) of wages to changes in the corporate tax rate. The overall range is fairly wide, but the evidence suggests “that a 1 percent change in corporate tax rates reduces worker wages by as much as 1 percent and as little as 0.1 percent.” And since 1984, overseas profits of U.S. multinational corporations have risen (erratically, to be sure) from about 40 percent to 70 percent, which is attributable, at least in part, to the high corporate tax environment in the United States.