Will GOP tax cuts mean wage growth for workers?
Tuesday, January 16, 2018
After months of discussion and debate, the Republican tax overhaul crossed the finish line at the end of 2017 when President Donald Trump signed the legislation into law.
Now the question is, will these tax cuts for businesses and individuals equate to wage growth in 2018? Not surprisingly, economists have different opinions on the answer.
"It is estimated that 61 percent of Americans will experience income tax cuts of more than $100 for 2019, with just over 8 percent seeing income tax increases," said Ryan Bourne, the R. Evan Scharf Chair for the Public Understanding of Economics at The Cato Institute. "So on the face of it, a majority of people will see after-tax pay rise as less money withheld for tax in their paychecks.
"The effects of business tax cuts on wages is more complex. The initial effect of a corporate rate cut is to increase the profitability of existing investments. Firms will have more after-tax profits than they expected, and some will no doubt use this to provide bonuses to workers."
However, capital investment holds more promise for hiking the labor force's pay, according to Bourne.
"The main mechanism that business tax cuts can boost wages is through new investment. This might take longer to feed through," he said. "The corporate cut combined with expensing on equipment investment should lower the marginal cost of new investment broadly, enhancing productivity, which should mean stronger wage growth in future.
"My central expectation then is that wage growth will be slightly higher in 2018 than it would have been, but more robust growth will be experienced in 2-3 years' time when the effects of these investments feed through."
Meanwhile, minimum wages will increase in 18 states and about 20 municipalities in 2018, according to the National Employment Law Project. However, the federal minimum wage has been at $7.25 an hour since July 24, 2009.
The Washington, D.C.-based Economic Policy Institute is skeptical that permanently cutting the corporate tax rate from 35 percent to 21 percent, effective in 2018, will have much positive impact on wage growth.
"The real key to boosting wage growth for the vast majority of American workers is restoring economic leverage and bargaining power that workers once had but which have been redistributed from workers to capital owners and corporate managers," according to Josh Bivens, an EPI economist. "Yet the Trump agenda has consistently pushed policies and rule changes that further weaken workers' leverage.
"I'm sure some of the tax cuts for business will end up in wages, but not most of it," said Dean Baker, senior economist at the Center for Economic and Policy Research in Washington, D.C. "We got a good example a couple of weeks ago. AT&T announced that it was giving a $1,000 one-time bonus to 200,000 workers.
"I looked at their books, and it looks like the tax cut should save them around $2 billion annually. The bonus comes to $200 million, or roughly one-tenth the size of the tax cut. The tax cut will mean higher profits indefinitely, whereas the bonus is a one-time gain. I'm not sure that this will directly lead to any special benefits for workers at the minimum wage, although I'm sure some will share in the gains."
On Jan. 11, Walmart, the mega-retailer and nation's biggest private-sector employer, announced that it "is boosting its starting hourly wage to $11 and delivering bonuses to employees, capitalizing on the U.S. tax overhaul to stay competitive in a tightening labor market," reports Bloomberg. That labor market trend, with an unemployment rate of 4.1 percent for October to December 2017, means a falling supply of job seekers, giving them increased bargaining power with employers seeking new hires.
But the case of Walmart may not apply uniformly to workers' wages, according to Bourne of The Cato Institute.
"Every company will be different," he said, "and it is perhaps unsurprising that many of the businesses which have already announced this are major corporations who do not tend to employ lots of low-paid employees. The main gains in terms of wages will come as investments make working more productive, and this should help people at all current wage levels."
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