During his weekly press conference on Thursday, Paul Ryan, Speaker of the House and de facto voice for sane Republicans, tried to drum up support for the GOP’s proposed tax plan by saying it would increase wages for the everyday working man. Central to Republican tax reform is a drastic cut in the corporate tax rate — from 35 percent to 20 percent — and Republicans are trying to sell the public on the bill by saying those savings will be passed on to workers in the form of increased compensation.
But the idea that a sudden decrease in the corporate tax rate — even one as steep as 15 percent — would have an immediate effect on employee compensation is delusional, according to Ed McCaffery, a professor of tax law at the University of Southern California, and other corporate tax experts. Rather, it will take years for the benefits of a lower corporate tax rate to reach workers, if ever.
For one, most corporations are already paying less than the 20 percent rate proposed in the Republican legislation. Case in point: The marginal effective corporate tax rate in the U.S. is 18.6 percent, according to the nonpartisan Congressional Budget Office. So lowering the statutory rate to 20 percent will be a largely superficial change for most large employers, says McCaffery. Therefore, it will have little effect on how much extra cash they keep on hand.
Nor are corporations likely to give raises even if they do end up paying less in taxes. “That’s not how it works,” says Daniel Shaviro, the Wayne Perry Professor of Taxation at New York University. “[Corporations] don’t give money away to other people. They don’t just start overpaying for things.”
Any benefit to workers will be indirect, and a function of wider economic growth. Ostensibly, businesses will invest more in capital, making workers more productive, and in turn, more valuable on the labor market and able to earn a higher salary. This is the “long, boring process of capital,” Shaviro says. As such, none of this will happen overnight.
“The real argument for labor benefitting from the tax bill is the economy will generally grow and benefit labor because of that,” says Steven Bank, professor of business law at at UCLA. “It’s not about corporations taking the savings and using the savings to give everyone a raise. Companies don’t just give out bonuses and increase wages because they have a sudden windfall.”
That hasn’t stopped Republicans, especially President Trump, from framing the tax cut as pro-labor, however. Trump has described the tax cut as “a big beautiful Christmas present” for the American people. And last month, the White House Council of Economic Advisers released a paper saying cutting the corporate tax rate to 20 percent will increase workers’ salaries by at least $4,000 a year (or about 7 percent of the median household income).
That figure is misleading, though, according to the Tax Policy Center. The CEA never specifies when workers will get this $4,000 raise, or how they will get the added income. The $4,000 is also an average across all workers, and gives the false assumption that any gains from the tax cut will be shared equally by everyone in the labor market.
The truth is the overwhelming majority of the benefits will go to the wealthy, according to McCaffery, a self-proclaimed populist. “This is a drastic transfer of wealth to the very rich in a way that will be difficult to reverse,” he says. “This money is gonna go into share buybacks, corporate dividends and corporations paying down some of their debt.” Some corporations might even use the tax savings to invest in automation and actually downsize their workforces.
Unions, were they still strong in America, might be able to collectively bargain for a portion of the tax savings shared with employers, or lobby and influence the legislation itself. But union membership has been in steady decline for decades. Only 10.7 percent of the American workforce was unionized in 2016, the lowest union membership rate since the Department of Labor began tracking the number in 1983. That year, more than 20 percent of American workers were in unions.
Shaviro even doubts that the tax cut will have a positive effect on the overall economy in the long-term. The decrease in tax revenue is going to be so drastic and cause the national debt to increase so significantly that many businesspeople will be wary of investing in U.S. corporations. “This [legislation] greatly increases the fiscal instability of the U.S.,” he says, “and that’s really going to dampen any economic gains we might see from it.”
So next time you hear a politician like Ryan or Trump claim that tax cuts will be an automatic godsend for labor, don’t believe them. “It’s very difficult to fact check the Republicans, Trump, the lobbyists and all the other people who are in favor of the plan,” McCaffery says. “They take advantage of the complexity of the tax code and that the average citizen doesn’t understand it. You can argue in the abstract that tax cuts spur growth and all these things. But we don’t live in the abstract.”