Will reducing the corporate tax rate actually lead to increased wages?

Democrats and others are claiming that the proposed Republican tax package’s reduction in the corporate tax rate is a sham and a ruse to benefit the one percent. It would actually only lead to enriching corporations and have zero effect on wages. A brief review of what real economists say will be refreshing.

Start here with David Henderson’s short post on the subject.

Let me quote the most germane part of Professor Henderson’s post:

So let me explain in simpler words by noting that the key assumption in the above is the assumption of a perfectly elastic long-run supply of capital. Why would it be perfectly elastic? Because capital is quite mobile across countries, so when one country’s government cuts its tax rate on capital, that draws in capital from around the world.

Why does this matter? The greater the stock of capital, the higher is the ratio of capital to labor, and, therefore, the higher is the marginal product of labor, and, finally, the higher is the real wage.

Thus increasing the marginal product of labor, i.e. the value of labor, entails rising wages.

If you follow the link to Professor Mankiw’s blog post you will see that he shows there is a multiplier bonus effect: every dollar of tax cut to capital (on a static basis) raises wages by $1.50.

Bingo. QED. Try explaining this to denialist Democrats with a vested interest in naïve counterfeit economics.    


Addendum: it might be helpful to say that there is a tight relationship between the marginal product of labor and wages (total compensation.) Greg Mankiw shows that as the former goes up, so does the latter. See  here  especially point #4 for a fuller, yet still simple explanation.



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