When you hear the phrase “tax reform” coming out of Washington, what comes to your mind? Huge tax cuts for the rich and bigger profits for corporations, right?
To many Americans, tax reform has become synonymous with corporate fat cats getting away without paying their fair share. This is a shame. It’s standing in the way of Americans getting a raise.
In its current form, our tax code kills American jobs and pushes American businesses to move to China, Canada and Mexico, among other places — all while rigging the system for the politically connected and powerful through tax subsidies, special carve-outs, and complexity that benefits those who can afford expensive lawyers and accountants.
It is well past time for an update. Washington has not significantly changed the U.S. tax code in more than 30 years.
Tax cuts and simplifications for individuals will be an important part of tax reform. But what if I told you the average American stands to gain the most from updating the business tax code? You’d be skeptical, right?
Yet it’s true. Despite what opponents of tax reform would like you to believe, the historical evidence is clear: When business taxes go down, worker’s wages go up.
President Donald Trump endorsed this truism in a recent speech to Heritage Foundation members, pointing out that “a lower business tax rate will likely give the typical American household around a $4,000 pay raise.” And that’s a conservative estimate.
The President’s Council of Economic Advisors recently released a report showing that updating the U.S. business tax code to compete with other countries around the world could boost worker’s wages by $4,000, and as much as $9,000 a year.
I know some people are still skeptical, but economic theory and the historical record support the president’s claim.
Businesses don’t just raise wages due to a sense of corporate benevolence. Rather, wages rise when the demand for workers increases. This forces businesses to increase wages out of self-interest, to keep their employees from being hired away by competitors.
American corporations pay a federal income tax rate of 35 percent — one of the highest in the world. If tax reform can lower that rate to 20 percent, American businesses and the workers they employ will be globally competitive again. Businesses will invest more, hire more workers, and be forced by the laws of supply and demand to raise wages.
This is exactly what happened over the past decade and half in neighboring Canada. In 2007, they began lowering their corporate tax rate, and guess what? Wages grew significantly faster in Canada than other comparable countries.
Most economic researchers agree. A recent review of ten separate studies published between 2007 and 2015 concluded that, when corporate taxes are cut, workers receive almost all of the benefit through higher wages.
According to research from Boston University, 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 analysis from Marquette University shows that tax reform could increases wages for an average family by as much as a $14,000 a year. That’s a big raise!
Policy wonks and researchers can debate which of these estimates is most accurate until the cows come home, but the key takeaway is clear. Updating the business tax code will raise wages.
Tax reform is not just for the rich and powerful. Tax reform that both lowers rates and removes tax subsidies and complexity will bring with it higher wages, more jobs and better opportunities for all Americans.
Those who dismiss any tax reform effort as just “tax cuts for the rich” are both defending the status-quo economy and doing a disservice to working Americans who stand to get a raise from tax reform.
Adam N. Michel is a policy analyst specializing in tax issues at The Heritage Foundation.