Michael J. Hicks, PhD, is the director of the Center for Business and Economic Research and the George and Frances Ball distinguished professor of economics in the Miller College of Business at Ball State University. His column appears in Indiana newspapers.
Almost nothing is as easy to demagogue as corporate tax rate changes. So, it might be helpful to share a bit of what economists know about the effect of changing these tax rates in advance of Congress openly debating the issue. It is also useful to understand why tax changes are needed.
To begin, corporate tax rates in the US are the highest in the developed world. Because people pay taxes, and corporations aren’t people (as the Occupy Wall Street folks so eloquently remind us), the tax burden falls on workers and shareholders in the form of lower wages and dividends. While it seems the Left cares about workers, and Wall Street cares about shareholders, I’d like to note that these are often the same people. Roughly the same proportion of adults who work also own stocks. These are teachers, bankers and plumbers with individual and group retirement accounts. Owning this stock makes us capitalists, so to coin a phrase, ‘we are all capitalists now’.
Tax policy and tax rates matter. At least, that is what the Obama administration and Congress argued as they passed the ‘stimulus bill’ in winter 2009. They were right of course, tax rate changes impact both consumption and investment. Lower tax rates boost both, while higher tax rates have the opposite effect. During the recession, the cuts were aimed directly at boosting consumption. We wanted households to buy more goods and services.
Today the problem is different. The recovery is more than eight years old, but we are stuck in a very slow growth expansion. Indeed, the average growth rate between summer 2009 and today is slow enough to radically alter what most of us think of as the American Dream. From the end of World War II through the start of the Great Recession, growth averaged roughly 3.5 percent. At that rate, the standard of living doubled every 25 to 30 years. In sharp contrast, at post-Great Recession growth rates, the American standard of living will double every 65 to 70 years. This has the potential to radically alter the way Americans think about opportunity and a shared future. It is time to accept some meaningful risk to change this outcome. Tax policy is one part of this effort.
Cutting corporate taxes will have an effect on wages, but it won’t come in the form of direct wage increases. Businesses don’t behave that way. Instead a reduction in corporate taxes will filter through to workers and shareholders as businesses adjust their production levels. Lower tax rates will induce investment and increased employment. ‘How much’ is a matter of considerable disagreement.
The Council of Economic Advisors reported a 3 to 5 percent increase in GDP resulting from the corporate tax cut, which would boost earnings an average of $4,000 per worker. The Tax Policy Center and the former Clinton Treasury Secretary Lawrence Summers offered a much lower figure, noting that the tax cut would only cut taxes by a bit more than $1,150 per worker, not all of which would be spent on employment. To further muddle the issues, a couple of well-respected economics professors reported estimates in the 3 to 5 percent range, largely agreeing with the CEA. Where is that one-handed economist?
The issue behind all of this disagreement is how much (or how little) the tax cut will cause an inflow of investment dollars from overseas. The exact amount of the impact cannot be known with the type of certainty accompanying most tax policy changes. Our taxes have never been this much out of balance with the rest of the world, thus estimating how much investment will flow back into the US from a corporate tax cut is a daunting task. But, I am not sure this is the most relevant issue.
Our current slow growth economy is a disaster, in that it means our kids are likely to experience less than half the economic growth we adults have grown up expecting. There is no single cause for slow growth, much less a single policy remedy. The corporate tax rate changes aren’t perfect, and they won’t solve all our growth problems. They are, however, a risk worth taking.