US President Donald Trump. Picture: REUTERS/JOSHUA ROBERTS
US President Donald Trump. Picture: REUTERS/JOSHUA ROBERTS

New York — Cutting the corporate tax rate to 20%, as President Donald Trump has proposed, would increase average household income by at least $4,000 a year, according to estimates in a White House study.

The study by Trump’s Council of Economic Advisers (CEA), released on Monday, says that kind of wage growth would take several years to go into effect, but it could eventually reach $9,000 a year. Other economists have previously questioned how beneficial such cuts would be for middle-income families.

The projection is based on the assumption that companies will be more inclined to invest in the US with lower taxes, increasing the demand for workers and driving up wages. But some economists suggest that corporate executives would be more inclined to use a tax windfall to increase shareholders’ dividends, or to invest in automation that could limit the need for more workers in some industries.

Trump and congressional leaders last month proposed a framework for tax legislation that would cut the corporate income tax rate to 20% from 35%. The plan would also slash the tax rate on income earned by the most lucrative pass-through businesses, such as partnerships and limited liability companies. And it would condense the existing seven individual income tax brackets to three or four — leaving it up to congressional tax writers to set the top marginal rate.

Facing criticism from some independent analyses of the plan’s effect on middle-class workers, the White House has been trying to portray its benefits for average US households. Trump has already used the $4,000 figure; he cited it in a speech last week in Pennsylvania.

Despite improvements in the economy in recent years, wage growth for the middle class has lagged behind corporate profit growth. Kevin Hassett, the head of Trump’s CEA, blamed that disconnect on the relatively high US corporate tax rate.

"Workers have paid a big price," Hassett said Sunday. "Productivity and wages have stagnated as corporate profits have soared, there has been a striking disconnect."

In arriving at its estimates, the CEA sought to determine how average household income would have changed in 2016 if a 20% corporate income tax had been enacted in 2008, and phased in over time. It found that an average US household making $83,143 in 2016 would have earned more than $4,000 in additional annual income. For the median household income of $59,039, the increase would be between $3,000 and $7,000 over the same period, according to the report.

Struggling workers’

The report’s use of "average" household income may not capture every nuance in terms of who would benefit from a corporate rate cut. The left-leaning Center on Budget and Policy Priorities has written that the highest earners — executives, lawyers and other professionals — are likely to get much higher wage bumps from "whatever share of corporate rate cuts goes to workers".

"Only a small benefit would ultimately flow to struggling workers who have been hurt most by slow wage growth in recent decades," the group wrote in August.

Also, it was not immediately clear how the CEA decided how much burden to assign to workers with regard to corporate taxes. Trump’s administration has tended to cite a large share; Treasury Secretary Steven Mnuchin has put workers’ portion of the corporate income tax at 70%. Other experts, including the Congressional Budget Office, use figures at about 25%.

Boon for middle class?

The report focused on the corporate tax rate and did not factor in the effect of other elements of the tax plan, such as the elimination of the estate tax or a one-time tax break for companies to bring back capital being held oversees.

Trump has repeatedly pitched the tax plan that he and Republican congressional leaders released in September as a boon for middle-class families. But until now, he has not offered many specifics to back that claim — and the plan itself contains too few details to determine its precise effects across individual income levels.

Independent policy groups have said that the Republican tax blueprint would disproportionately benefit the highest earners — and that it might mean higher taxes for at least some middle-income taxpayers. One study, which used details from previous Republican plans to fill in the blanks on the current proposal, found that about 30% of Americans making from $50,000 to $150,000 per year would ultimately pay more tax.

Trump and his advisers have argued that cutting the corporate tax rate will benefit workers by encouraging companies to expand and offer higher wages to attract and retain employees. In addition to cutting the corporate tax rate to 20% from 35%, multinational corporations would be allowed to pay even lower — but still undetermined — rates on an estimated $2.6-trillion in earnings that their offshore subsidiaries have accumulated.

Going forward, such companies would not have to pay any US tax on most of their offshore earnings any more, a major change from the current system.

The US currently applies its corporate income tax globally, although companies are allowed to defer paying that tax on foreign earnings until they return it to the US, or "repatriate" it.

Bloomberg

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