Corporate rate cuts fuel further income inequality, plain and simple

Two weeks ago, the Trump administration released a one-page outline sketching out how they would like to approach changes to the tax code. Predictability, instead of sweeping revenue-neutral reform, the plan simply slashes tax rates, particularly for high-income households and corporations.

These corporate cuts were in turn heralded by their expected beneficiaries as helping the country’s “competitiveness,” a common talking point pushed by those looking to cut corporate rates. But claims that corporate rate cuts boost “competitiveness” are nothing but a distraction from the fact that such cuts do nothing to boost incomes or jobs for the vast majority of Americans.

{mosads}If a policy is going to benefit working and middle-class American households, it must create jobs, boost economic productivity or progressively redistribute income. Cutting the corporate income tax fails all three tests.

Currently, the economy remains below full employment, with aggregate demand (spending by households, businesses and governments) still too low to absorb all the hours of work Americans want to offer. So, fiscal policy changes that spurred aggregate demand would be good. However, corporate tax cuts are the least-efficient way to boost aggregate demand and job creation.

In the short run, corporate rate cuts are passed through to shareholders, who are overwhelmingly well-off and much more likely to save rather than spend the extra money. If the government wants to cut taxes in the short run to spur employment, those tax cuts should be aimed at low- and middle-income households, not high-income shareholders. A better way to spur employment would be to boost public spending — on infrastructure or other public investments, or increases in income support programs.

There is a better theoretical case that corporate tax cuts might help boost productivity. When the economy is at full employment, cutting the corporate rate should increase the post-tax return to capital. This should incentivize more private savings, which should in turn lower interest rates and increase capital investment.

The increased investment would provide workers with more and newer capital goods, boosting labor productivity. But while the theoretical channel linking corporate rate cuts and productivity growth is valid, there isn’t real-world evidence arguing that this link is strong. First, there’s already a well-known glut of savings. This savings glut has kept interest rates low for years and will likely continue to keep them low in the future.

With savings already high and interest rates already low, corporate tax cuts just won’t have much traction in boosting investment. Second, cutting the corporate rate can boost private savings, but if the rate cut isn’t paid for, this boost to private savings will be offset by decreased public savings (i.e., higher budget deficits). The deficit will increase, eventually pushing up interest rates and reversing the theoretical channel through which corporate rate cuts could increase productivity.

Finally, besides being a terribly inefficient job-creator and having only weak real-world effects in boosting productivity, a strategy of cutting corporate rates is unambiguously regressive. The corporate income tax is typically assumed to ultimately fall largely on capital owners. Capital income is highly-concentrated at the top of the income distribution — with the top 1 percent of households holding 54 percent of all capital income.

In theory, some of this regressive effect could be mitigated by a boost to productivity. But, as we noted, this is far from a sure bet. But even if productivity does increase, it turns out that most of the benefits of productivity growth haven’t trickled down in decades. The hourly pay of the vast majority of U.S. workers has lagged far behind productivity growth due to rising income inequality. 

Policymakers should focus on measures that will boost the living standards of the vast majority of Americans — not just what will boost the profits of corporations. When someone says that corporate rates must be cut to boost our “competitiveness”, they should be challenged to tell a credible story about how “competitiveness” will translate into more jobs, higher productivity, or a more progressive distribution of income.

If they can’t (and they really can’t) then we should dismiss talk of competitiveness as the distraction that it is. 

Hunter Blair is a budget analyst for the Economic Policy Institute, a nonprofit think tank that aims to include the needs of low- and middle-income workers in economic policy discussions. Blair holds a masters in economics from Cornell University.

The views expressed by contributors are their own and not the views of The Hill.