Workers, Not High-Earners, Are the Real Winners with Tax Reform

President Donald Trump, in a bold claim echoed by economists and business leaders, said his tax reform plan will be “like rocket fuel” for the economy. Last week, the U.S. House set the stage to approve that plan.

To get it to the President’s desk by end of the calendar year, Republican Leaders will have to reinforce some in their ranks against the tired litany that pro-growth tax relief is a “giveaway to the rich.”  

It’s nothing of the sort according to a broad range of economists, and according those creating the greatest number of jobs that pay the highest wages in this country – America’s manufacturers. A third quarter survey by the National Association of Manufactures (NAM) shows that manufacturers, with tax reform in their sights, are more optimistic than ever recorded before.

A strong majority of manufacturers said a pro-growth tax reform package would make them more likely to expand their business (64.3 percent), hire more workers (57.3 percent) and increase employee wages and benefits (52.2 percent). 

 “Manufacturers are all in for tax reform with plans to hire more workers in America, expand operations in America and invest in America—if our leaders come together to achieve bold reform,”, NAM President and CEO Jay Timmons and PMA President David N. Taylor said in a joint statement.

“The current tax code lets other countries win, so there is no excuse for supporting the status quo. Opposing tax reform means opposing larger paychecks for workers and opposing more manufacturing in the United States. Other countries have modernized their tax code to attract new business and create new jobs.”

More details of the plan are expected Wednesday, but some of the key corporate changes are already in place or close to being set. One would lower the corporate rate from 35 percent (as high as 39 for some businesses), to 20 percent; a level more in line with the rest of the industrialized world. Another change removes the disincentive that global U.S. companies now have against bringing overseas earnings home for reinvestment in American production; under the change to a territorial system, companies will no longer be double-taxed for profits earned in other counties. Another improvement will allow companies to fully expense investments for five years, while limiting interest deductibility.

Higher wages for workers are sure to follow. Wages are significantly responsive to corporate taxation, according to the study, “A Spatial Model of Corporate Tax Incidence,” by the American Enterprise Institute (AEI) that researched the link between taxes and manufacturing wages for a panel of 65 countries over 25 years.

“Higher corporate tax rates depress wages,” authors Kevin A. Hassett and Aparna Mathur wrote. “We also find that tax characteristics of neighboring countries, whether geographic or economic, have a significant effect on domestic wages. These results are consistent with the frequently employed assumptions in the public finance literature that capital is highly mobile, but labor is not. Under these conditions labor will bear the burden of capital taxes.”

In a phone interview, Mathur summed up the study by saying,  “while the cut in the corporate rate is being viewed as a giveaway to the wealthy, research suggests that the real winners might be working class families in America, as American businesses expand and grow their productive investments in the U.S.”

Other economic studies reached the same conclusions. A recent review of 10 separate studies by Adam Michel, Tax Policy Analyst at the Heritage Foundation, showed that when corporate taxes are cut, workers receive almost all of the benefit through higher wages.

Some of the results: a Boston University study showed that updating the tax code would result in a roughly $3,500 wage increase for every working American. Similar reforms have been modeled by the Tax Foundation, finding an increase in wages for an average household of around $4,000 a year. And an analysis from Marquette University shows that tax reform could increases wages for an average family by as much as a $14,000 a year.

To position the tax reform package for final passage, the House last week adopted the Senate’s $4 trillion budget framework. And in early October, the House approved a budget resolution with instructions that a budget bill need a simply majority of 51 votes for approval, blocking Senate Democrats from stonewalling the plan with a filibuster

To be sure, the Republicans adopted the same approach in an attempt repeal Obamacare and in the Senate still came up one vote short. But policy analysts say tax reform is a different animal.

“The danger is that some Republicans will start to waver when they start debating the finer points of the plan,” said Alex Brill, Resident Fellow at AEI. “But two things are in their favor. The Republicans need a win and for many of them this is a higher priority than health care.”

The pressure is on… from the President, to Congress, to the workers, and industries that employ them.

On October 22, the date that marked the anniversary of the Tax Reform Act of 1986, President Trump wrote in an article published by USA Today stating, “the era of economic surrender is now over.” He noted that his Administration has “removed intrusive, job-killing regulations at a record pace.” As a result, “unemployment is at a 16-year low. Wages are rising. Manufacturing confidence is higher than it has ever been.” However, the president added that, “our economy cannot take off like it should unless we transform our outdated, complex and burdensome tax code, and that is exactly what we are proposing to do.”

For NAM’s Jay Timmons, the time for politics is over. The time to act on tax reform is now.

“For manufacturers, this is not about personality. It’s not about political party,” Timmons said in a recent Fox News interview. “It’s about policy... We have a 30-year noncompetitive tax code. We need to get this done.”

 

 

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