Kim Clausing: Would Cutting [U.S.] Corporate Taxes Raise Workers’ Incomes?

Should-Read: Kim Clausing gets one wrong. Greg Mankiw does not say that “it is possible for a 1 dollar reduction in corporate taxes to result in a more than 1 dollar increase in wages”. He says, instead: in a model in which the U.S. is a small open economy, in which all corporate profits are a return to capital investment (rather than some of them being rents, returns to bearing risk, or market power), in which the revenue lost is made up by other taxes that do not cause economic distortions, then at least the “static” assessment is that a one dollar reduction in corporate taxes generates a 1/(1-t) dollar increase in wages.

Now since the U.S. is not a small open economy, since a substantial share of corporate profits are not returns to corporate investment, since steps to rebalance the public fisc will induce other economic distortions, and since misinterprets what a “static” assessment is (or—more likely, I think—made an algebraic error), he in fact does not say that it is conceptually possible that “cutting [U.S.] corporate taxes [would] raise workers’ incomes”. Nevertheless, he leaves himself open to Clausing’s thumbnail as a summary:

Kim Clausing: Would Cutting [U.S.] Corporate Taxes Raise Workers’ Incomes?: “Overall, it is difficult to document a relationship between lower corporate taxes and higher wages…

…Some… including Jason Furman, Lawrence Summers, and Paul Krugman, found it implausible to argue that for every dollar of corporate tax cut, workers wages would rise by at least $2.50, and perhaps as much as $5.50, as implied by the CEA’s report. Other economists have argued that it is possible for a $1 reduction in corporate taxes to result in a more than $1 increase in wages (see for instance Casey Mulligan and Greg Mankiw), but even most of those economists do not back the wildly optimistic numbers of the CEA report.

Some cross-country analyses report a pattern between higher corporate taxes and lower wages, but these studies have some important limitations; I have found no empirical evidence in my own research to support the idea that countries with higher corporate tax rates have lower wages…