Is the Trump corporate tax cut working?
First, jettison the debate you have been hearing. Corporate bonus payments do not indicate that the reforms — lowering the corporate rate from 35 to 21 percent, and (temporarily) allowing businesses to write off the full cost of certain investments in the year they are made — are working to raise the wages of workers and increase business investment.
And opponents of the law are making misguided arguments, as well. They argue that businesses aren’t “using” their tax savings “appropriately.” But the idea was never that the tax cuts would generate a pool of money, which could be used to raise wages, increase investment, or for stock buybacks.
How are the tax cuts supposed to work?
The rate cut provides incentives for self-interested companies to earn additional taxable income by allowing them to keep more of it. Businesses respond to these incentives by making additional investments in, say, factories and equipment in the U.S. The full-expensing provision also makes U.S. investment more profitable and therefore more attractive to businesses.
The additional investment will make workers more productive, because they can produce more output with more capital. More productive workers are more valuable to businesses, which will compete for employees more aggressively. This will drive up wages, as employers try relatively harder to retain their existing workers and to attract new ones (both from other businesses and from outside the labor force).
My latest Bloomberg column argues that there is every reason to expect that this basic economic argument will play out. We should expect the corporate cuts to raise investment and wages.
Check out my full argument here. Your comments, as always, are very welcome.