The Biggest Myth About Trump’s Tax Cuts

Authored by: Matt Palumbo

President Donald Trump’s Tax Cuts and Jobs Act was the first case of comprehensive tax reform since the 1980s, but listen to some on the Left, and you’d be left with the impression that workers are just getting “crumbs.” According to Nancy Pelosi:

In terms of the bonus that corporate America received versus the crumbs that they are giving to workers to kind of put the schmooze on is so pathetic. It’s so pathetic. And I would hope that with their big advantage of bringing money home at a very low rate, that they would invest in infrastructure and things. But our experience has been that they will do dividends. They will do stock buy-backs and things like that. I think it’s insignificant.

Pelosi was specifically speaking of the $1,000 bonuses that a number of companies announced for their employees to celebrate the passage of Trump’s bill.

Such “logic” can’t help but bring a quote from Margaret Thatcher addressed at the socialists of her day: “What the honorable member is saying is that he would rather that the poor were poorer, provided that the rich were less rich. So long as the gap is smaller, they would rather have the poor poorer. ”

In addition to her logical flaw, the facts aren’t on her side either. While share buybacks are the single largest individual purchase that companies are making with their tax cut savings, the majority is in fact going back to employees and investment, as proven by this chart from Bloomberg complaining about buybacks:

And the more fatal flaw in her logic is that Trump’s corporate tax cuts won’t benefit the worker in other ways. This isn’t “trickle down economics,” but rather the acknowledgement that corporations offset the cost of the corporate tax cuts by reducing worker wages. A handful of studies from economists all along the ideological spectrum have reached such a conclusion, the disagreement is just on the extent.

To summarize just a few:

  • A review of the academic literature on the corporate tax conducted by the U.S Department of the Treasury found that, “labor may bear a substantial portion of the burden from the corporate income tax.”
  • Economist Arnold C. Harberger, known for authoring a seminal paper on the effects of the corporate income tax rate on international trade, has found that labor bears over 80% of the corporate tax.
  • According to Oxford University economist Li Liu and Rutgers economist Rosanne Altshuler, for every $1 increase in corporate tax revenue, wages decrease by 60 cents.
  • Wiji Arulampalam, Michael P. Devereux, and Giorgia Maffini of Oxford University found that $1 in additional corporate tax reduces wages by 92 cents in the long run.
  • According to economist Alison Fenix, “a one percentage point increase in the marginal corporate tax rate decreases annual wages by 0.7 percent.”

Kevin Hassett, Trump’s chair of the President’s Council of Economic Advisers, created a stir when he said that Trump’s plan to reduce the corporate tax rate to 21% would increase the average families income by $4,000, but if we were to apply the projected wage gains from the 12 most vigorous studies examining the effects of over 100 corporate tax cuts in the U.S. and other OECD nations on wages, the Trump tax cuts could boost the average household’s income by $16,000. That’s not going to be realized in America, as those studies included a handful of small nations that skewed the wage gains (expressed as a percentage) upward, but clearly Hassett can afford a large margin of error there,

And obviously, corporate tax cuts not the main benefit in Trump’s tax package for low-income and middle-class workers. The bill reduced tax rates, and doubled the standard deduction to $12,000 for a single worker, and $24,000 for married couples.

It’s hardly “crumbs.”

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