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How Corporate Tax Cuts Benefit Consumers and the ‘Little Guy’

by The Daily Signal | 3.27.18

Gary Wolfram / @Gary_Wolfram / February 09, 2018

Gary Wolfram is the William E. Simon professor in economics and public policy at Hillsdale College.

Since Republicans passed the tax bill last December, the country has seen a wave of hand-wringing and hysteria.

Sen. Elizabeth Warren, D-Mass., gave voice to the opinion of many when she recently declared that the Republican tax plan is “the biggest tax giveaway to giant corporations in modern memory.”

But if we really want to get our heads around the Republican tax bill, our best guide comes not from contemporary histrionics, but historic economic analysis.

In 1848, French economist Frederic Bastiat wrote a famous paper, “What Is Seen and What Is Not Seen.” In it he stated:

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There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect [of an institution or law]; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

The problem with Warren’s claim is that it is a classic case of what Bastiat is talking about: noticing what is seen while ignoring the unforeseen. If we’re going to have a substantive debate on tax policy, we must take into account what is unforeseen.

And that principle doesn’t just apply to Republican corporate tax cuts. It applies to Democrat tax increases as well.

When the government levies a tax on corporations, that is not the end of the story. There are all kinds of other consequences. The tax will affect the return that corporate-sector industries make from producing, which will lead to less production.

Less production in the corporate sector will drive up the price of goods that consumers purchase from corporations. So the tax burden placed on corporations actually falls on consumers in the form of higher prices.

What’s more, with less being produced in the corporate sector there is less need for labor, and when the demand for workers is reduced, wages will fall. Thus, some of the tax levied on corporations will be borne by workers.

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The degree to which laborers will feel that burden depends upon a number of things, including their ability to move to other areas such as the noncorporate sector.

But if workers are able to move to the noncorporate sector, then the supply of workers in the noncorporate sector rises, which in turn will drive down wages in that sector. So part of the tax will be borne by workers in the noncorporate sector.

The important point to take from all this is, of course, that policy is never as simple as direct cause and direct effect. One has to consider all of these effects and more when crafting and implementing laws.

So what, then, are the effects of the Republican tax plan?

Currently, the U.S. corporate tax rate is the highest in the industrialized world. The visible effect of the Republican tax plan is to cut that rate from 35 to 21 percent, bringing the U.S. rate down to the average of European countries.

This will make investment in the United States more attractive and will increase the competitiveness of our corporations worldwide.

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If one simply looks at the direct effect, it does appear that the beneficiaries of the corporate income tax rate will be the corporations themselves. If one attempts to foresee the invisible results, however, the same economic effects outlined above will occur, but in reverse: The reduced costs of producing in the corporate sector will lead to greater output, lower prices for consumers, and increased wages for workers.

In 2012, a Tax Foundation survey of the economic journal literature found that every study published in the prior 15 years found taxes had negative effects on economic growth, and studies that distinguished between different types of taxes found that the corporate income tax had the largest negative effect.

One may certainly debate the degree of these positive effects and the time it will take for them to fully flow through the economy. But the issue of cutting the corporate tax rate to make our country competitive with other nations should not be dismissed as a giveaway to corporations.

Rather, voters should think through how it actually affects the amount of production, investment, prices, and wages—and that means doing what Bastiat suggests and looking for the effects that are unforeseen.

The Daily Signal

Written by The Daily Signal

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