Although Republicans have sold their tax cuts as a sure-fire way to create jobs and boost incomes for middle- and working-class Americans, a recent economic study casts more doubt on that still-controversial claim.
In a working paper published in May, Ethan Rouen of Harvard Business School and Suresh Nallareddy and Juan Carlos Suárez Serrato of Duke University found that corporate tax cuts provide no income boost for workers making less than $200,000 per year. They do, however, raise incomes for the small number of earners above that income level. The combined effect makes income inequality worse, the authors found.
The analysis relied on state tax data for the analysis, due in part to the higher frequency of state-level changes in tax structures, but the authors say the dynamics should be largely the same at the federal level. The mechanism involved is relatively simple: cutting corporate taxes causes wealthy individuals to shift more towards capital income and away from wages and salaries in order to benefit from lower tax rates. Ordinary workers typically don’t have the option to shift income, and therefore have nothing to gain.
"We find tax cuts lead to higher reported capital income and a decrease in wage and salary income. These effects are concentrated among top earners, and we find no effects for those reporting less than $200,000 in income," the authors wrote.
In the long run, corporate tax cuts are supposed to help create more investment and higher wages for all workers, but the authors said there’s little evidence of that in their data. While tax cuts do boost investment, the resulting income gains are captured by business owners. “We have seen corporate profits rise and unemployment fall to historic lows, but wages have been stagnant. So far, there is no evidence that the tax cuts are changing this pattern,” Rouen told the Harvard Business Review earlier this month.
