Corporate Profit Tax Cuts and Wages: the UK Experience Kimberly Clausing and Edward Kleinbard have each written some interesting papers on transfer pricing. Here they team up on a different topic: The President’s Council of Economic Advisers claims that slashing the corporate tax rate to 20 percent would boost the average American’s wages by ,000 per year (“very conservatively”) — and perhaps by as much as ,000. If true, that would be a remarkable gain for working Americans. Unfortunately, it’s extraordinarily unlikely to be true. The two of us can think of dozens of objections to the CEA claim, presented in an official report, but perhaps the place to start is with the United Kingdom, which has already run this experiment. Over the past decade, the
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Corporate Profit Tax Cuts and Wages: the UK Experience
The President’s Council of Economic Advisers claims that slashing the corporate tax rate to 20 percent would boost the average American’s wages by $4,000 per year (“very conservatively”) — and perhaps by as much as $9,000. If true, that would be a remarkable gain for working Americans. Unfortunately, it’s extraordinarily unlikely to be true. The two of us can think of dozens of objections to the CEA claim, presented in an official report, but perhaps the place to start is with the United Kingdom, which has already run this experiment. Over the past decade, the United Kingdom has slashed its corporate tax rate, in several steps, from 30 percent down to 19 percent. At the same time, the United States has kept its corporate tax rate constant at 35 percent. Like the United States, Britain has a large open economy, investors in British firms come from all over the world, and Britain provides a sound legal and regulatory environment.
They next document the decline in real median wages in the UK since the UK began its experiment with lower corporate tax rates. They then note:
Of course, the UK example is just one case, but this comparison is a great deal more relevant to the CEA’s claims than the slapdash comparison it presents near the start of its report. The report compares US wage growth over three years to wage growth in 10 unnamed “low-tax” developed economies. But the United States is simply not comparable to small-economy tax havens like Ireland and Switzerland. What’s more, the CEA comparison focuses on average wage growth, while our chart uses median wages.
Their critiques of what the CEA under Kevin Hassett continue. But let’s stick to the idea of using the experiences of other nations who have also reduced corporate profits taxes. KPMG provides corporate profits by nation over the 2003 to 2017 period. Other nations have followed the UK lead. For example, Japan’s rate has been lowered from 42% to less than 31%. One has to ask why didn’t the CEA do comparisons based on nations like Japan and the UK.