The Cost

still provide investors with the required return. Businesses will therefore limit their activities to higher-return projects. Thus, all else equal, a higher effective marginal rate for businesses will tend to reduce the level of investment, and a lower effective marginal rate will tend to encourage additional projects and a larger capital stock. Increases in the capital available for each worker’s use, also referred to as capital deepening, boost productivity, wages, and output.”³

In a footnote to that passage Team Obama recognized the work of an economist named Kevin Hassett.⁴ Along with his colleague Aparna Mathur, Hassett had been studying the impact of corporate taxation on worker wages for nearly a decade. Hassett and Mathur were trying to figure out who really ends up paying corporate income taxes. They were curious if such taxes are like sales taxes. A lot of economic research has found that consumers carry most of the burden of sales taxes, because when such taxes increase, companies usually don’t cut their prices to offset the tax hike. The consumer gets stuck paying the tab.⁵

In an August 2016 op-ed in the Wall Street Journal, Hassett and Mathur explained their work: “We applied a similar method to study the impact of corporate taxation on the wages of blue-collar workers. If a higher corporate tax reduces the return to capital, then capital may move abroad. This outflow could reduce the productivity and compensation for domestic workers, who are relatively immobile. So just as a sales tax might have an impact on the final goods price, a higher corporate tax might have an impact on wages. If wages go down when corporate taxes go up, the worker is left holding the tax bag.”⁶

And that’s exactly what was happening, especially to workers in the U.S. “Our empirical analysis, which used data we gathered on international tax rates and manufacturing wages in 72 countries over 22 years, confirmed that the corporate tax is for the most part paid by workers,” the economists wrote.⁷

Hassett and Mathur also noted that they weren’t the only ones confirming this phenomenon: “In a 2007 paper Federal Reserve economist Alison Felix used data from the Luxembourg Income Study, which tracks individual incomes across 30 countries, to show that a 10 percent increase in corporate tax rates reduces wages by about 7 percent. In a 2009 paper Ms. Felix found similar patterns across the U.S., where states with higher corporate tax rates have significantly lower wages.…

“… Harvard University economists Mihir Desai, Fritz Foley, and Michigan’s James R. Hines have studied data from American multinational firms, finding that their foreign affiliates tend to pay significantly higher wages in countries with lower corporate tax rates.”⁸

Hassett and Mathur concluded that there was a clear path to higher wages: “One need only cut corporate tax rates. Left and right leaning countries have done this over the past two decades, including Japan, Canada, and Germany. Yet in the U.S. we continue to undermine wage growth with the highest corporate tax rate in the developed world.”⁹

Not for long. Trump was elected that fall on a promise of tax reform and took office on January 20, 2017. The need for reform of the tax code wasn’t recognized just by academic economists but most of all by the executives who had to operate under it. Four days after Trump’s inauguration, FedEx chief executive officer Fred Smith appeared on Mornings with Maria and explained that a person with a high school education needs “a bulldozer or a tractor or a truck or a plane or something, a piece of capital equipment to allow them to make more money, to have a good income. So our real problem is our tax code is punitive towards capital investment.” Smith added that if “you fix the tax code to incent investment in the United States, you’ll see a lot of these blue-collar jobs that the president talked about so much during the campaign, come back.”¹⁰

Trump kept saying the same thing as president, instructing his economic team to draft a plan to slash the corporate income tax rate to the 15 percent he had promised and to provide relief for small- and mid-size firms, not just large corporations. Not that the captain of Trump’s economic team had to be persuaded. The president had selected Kevin Hassett to chair his Council of Economic Advisers. Now Hassett would get to apply his research to solving America’s competitiveness problem. Hassett’s colleague Aparna Mathur would join the team later in the Trump administration.

The evidence for lowering corporate tax rates to raise worker compensation continued to pour in. At Canada’s University of Calgary, Kenneth McKenzie and Ergete Ferede showed the impact in Canadian dollars of increasing the regional corporate income tax (CIT) on businesses up north: “We calculate that for every $1 in extra tax revenue generated by an increase in the provincial CIT rate, the associated long-run decrease in aggregate wages ranges from $1.52 for Alberta to $3.85 for Prince Edward Island. Applying our estimates to the recent 2 percentage point increase in the CIT rate in Alberta we calculate that labour earnings for an average two-earner household will decline by the equivalent of approximately $830 per year, which amounts to a $1.12 billion reduction in aggregate labour earnings for the province.”¹¹

There’s an argument that the appropriate corporate tax rate is zero—and not just to benefit workers. Corporate income taxes represent multiple taxation because shareholders had to pay taxes on the money they earned before investing it in the business and they will be taxed again if they take profits out of the business via dividends and again if they sell at a gain.

Trump wasn’t arguing for a repeal of the corporate income tax. He wasn’t even trying to match Ireland’s 12.5 percent rate, which had lured businesses from the U.S. and continental Europe to set up shop on the Emerald Isle. The fast-growing Irish economy was an impressive model, but in the United States, Trump simply wanted to transform the highest rate in the developed world into