Oops, they did it again. After Republicans rammed through their big tax cut, there were a rash of stories about corporations using the tax break to give their workers bonuses. Have the media learned nothing from the Carrier debacle? After all, companies have every incentive to curry favor with a sitting administration by attributing nice things they would have done in any case to Dear Leader's glorious policies. Amid tightening labor markets lots of firms would have been trying to attract or hold workers by offering a bit of money; why not use the occasion to hype something that raises your after-tax profits?
Anyway, now we have enough information to start assessing the real impact of the tax cut. No, it isn't going into wages; you should never have expected that in the short run anyway. What's more, we aren't even seeing the kind of response that would raise wages in the long run. And it's even possible, as I'll explain, that the tax cut could reduce wages.
1. The optimists' theory of the case
What was the theory of the case for those who believed, or at least claimed to believe, that a cut in corporate taxes would be passed through into wages? The story, as told by people like Kevin Hassett or the Tax Foundation, was that (a) markets for goods and labor are close to perfectly competitive, and (b) America is part of a global capital market that more or less equalizes after-tax rates of return. The idea, then, was that by reducing the rate of taxes on corporate profits, America would attract inflows of capital from the rest of the world. A rising capital stock would drive pre-tax returns on capital down and, by increasing competition for labor, drive wages up. In the long run, they claimed, all the benefits would go to workers.
There were multiple reasons not to believe in this story. One reason is that the U.S., if only because of its sheer size, doesn't face a perfectly elastic supply of capital from the rest of the world; even in the long run, we would expect a tax cut to raise after-tax profits. Another is that we're nowhere close to perfect competition: a lot of corporate profits represent some kind of monopoly rent, and there's no reason to expect capital inflows to compete those rents away. indications are even less favorable than the critics expected.
And even if there were some truth to the optimists' case, it's about the long run. In the short run, before there has been time for a major change in the capital stock, we shouldn't expect to see any wage rise at all.
The only way you might see some immediate wage gains would be if two things were true: companies aren't in a highly competitive environment – they have some freedom to set wages – and they have some interest beyond profit maximization in keeping workers happy, either out of the goodness of their hearts or because management doesn't like being hated.
I don't want to totally discount this possibility. Once upon a time, when we had powerful unions and companies like GM saw themselves as having multiple "stakeholders" rather than simply maximizing profits, one could have imagined seeing corporations share some of a tax windfall with workers. And there might be a tiny bit of that mindset operating even today – but as I'll explain shortly, that might not have the implications that you imagine.
2. Tax cuts so far
After initially falling for the bogus bonus story, news organizations have mostly caught up with reality: the tax cut isn't being passed through to workers. Mainly it's being used for stock buybacks.
The failure to raise wages immediately comes as no surprise. It's what even supporters of the tax cut would have predicted, if they'd followed through on the logic of their own analysis.
The prevalence of stock buybacks is, however, another story. The pro-tax-cut case didn't predict a short-run rise in wages, but it did predict a big rise in investment, financed by capital inflows – not simple recycling of the tax cut to investors.
So far, however, as Dean Baker points out, there is no indication of an investment boom. Orders for capital goods aren't up, actual investment spending doesn't seem to rising any faster than before, investment intentions haven't spiked. What this means is that the process that was supposed to raise wages in the long run isn't happening, at least not yet.
One other indicator: if the tax cut were really leading to big inflows of capital, that should be lifting the dollar. In reality, the dollar is weaker than it was before the tax cuts:
So what story do the early data seem to tell? Well, they're consistent with the view that corporate profits include a large component of monopoly rents. In that story, if you give corporations a big tax cut, they don't invest more, compete for workers, or any of that stuff. They just take the money and run, which is what we seem to be seeing.
3. Can tax cuts actually reduce wages?
Let me finish with a possibility I haven't seen mentioned: tax cuts might actually provide companies with an incentive to reduce wages. What? Let me explain.
There's a large literature trying to explain why executive compensation rose so much from the 1960s to the 1990s. One hypothesis, as expounded for example by Piketty, Saez, and Stantcheva, is that CEOs used to pay themselves less than they could have as a way to "make peace" with workers, customers, etc.. And one reason for this self-restraint was that given high marginal tax rates, executives who extracted very high pay packages wouldn't get to keep much of the money anyway.
The point is that when tax rates came down, the payoff to greed went up, and outweighed the former fear of opprobrium.
Now suppose that a bit of that old reluctance to be quite as hard on one's workers as one might remains. And add in the growing evidence that many employers have substantial monopsony power – that is, they aren't facing a competitive labor market, but instead have quite a lot of ability to set wages.
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In this case, cutting corporate tax rates could actually have a perverse effect. Squeezing workers even harder than you already are raises pre-tax profits, but you might be reluctant to do it – and the price of your qualms is less if a substantial part of any profit gain goes to the IRS. Reduce that marginal tax rate, and exploiting workers to the max becomes a more attractive strategy.
I don't really think this is an important effect. But if you believe that corporations are going to share the benefits of tax cuts with workers out of the goodness of their hearts, you have to acknowledge that the price of a good heart has actually gotten higher, not lower, thanks to these tax cuts – because as conservatives like to remind us, it's the marginal rate that matters.
So are workers going to benefit a lot from these tax cuts? There was never a very good reason to think they would, and early indications are even less favorable than the critics expected.
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And even if there were some truth to the optimists' case, it's about the long run. In the short run, before there has been time for a major change in the capital stock, we shouldn't expect to see any wage rise at all.
The only way you might see some immediate wage gains would be if two things were true: companies aren't in a highly competitive environment – they have some freedom to set wages – and they have some interest beyond profit maximization in keeping workers happy, either out of the goodness of their hearts or because management doesn't like being hated.
I don't want to totally discount this possibility. Once upon a time, when we had powerful unions and companies like GM saw themselves as having multiple "stakeholders" rather than simply maximizing profits, one could have imagined seeing corporations share some of a tax windfall with workers. And there might be a tiny bit of that mindset operating even today – but as I'll explain shortly, that might not have the implications that you imagine.
2. Tax cuts so far
After initially falling for the bogus bonus story, news organizations have mostly caught up with reality: the tax cut isn't being passed through to workers. Mainly it's being used for stock buybacks.
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The failure to raise wages immediately comes as no surprise. It's what even supporters of the tax cut would have predicted, if they'd followed through on the logic of their own analysis.
The prevalence of stock buybacks is, however, another story. The pro-tax-cut case didn't predict a short-run rise in wages, but it did predict a big rise in investment, financed by capital inflows – not simple recycling of the tax cut to investors.
So far, however, as Dean Baker points out, there is no indication of an investment boom. Orders for capital goods aren't up, actual investment spending doesn't seem to rising any faster than before, investment intentions haven't spiked. What this means is that the process that was supposed to raise wages in the long run isn't happening, at least not yet.
One other indicator: if the tax cut were really leading to big inflows of capital, that should be lifting the dollar. In reality, the dollar is weaker than it was before the tax cuts:
Image
So what story do the early data seem to tell? Well, they're consistent with the view that corporate profits include a large component of monopoly rents. In that story, if you give corporations a big tax cut, they don't invest more, compete for workers, or any of that stuff. They just take the money and run, which is what we seem to be seeing.
3. Can tax cuts actually reduce wages?
Let me finish with a possibility I haven't seen mentioned: tax cuts might actually provide companies with an incentive to reduce wages. What? Let me explain.
There's a large literature trying to explain why executive compensation rose so much from the 1960s to the 1990s. One hypothesis, as expounded for example by Piketty, Saez, and Stantcheva, is that CEOs used to pay themselves less than they could have as a way to "make peace" with workers, customers, etc.. And one reason for this self-restraint was that given high marginal tax rates, executives who extracted very high pay packages wouldn't get to keep much of the money anyway.
The point is that when tax rates came down, the payoff to greed went up, and outweighed the former fear of opprobrium.
Now suppose that a bit of that old reluctance to be quite as hard on one's workers as one might remains. And add in the growing evidence that many employers have substantial monopsony power – that is, they aren't facing a competitive labor market, but instead have quite a lot of ability to set wages.
ADVERTISEMENT
In this case, cutting corporate tax rates could actually have a perverse effect. Squeezing workers even harder than you already are raises pre-tax profits, but you might be reluctant to do it – and the price of your qualms is less if a substantial part of any profit gain goes to the IRS. Reduce that marginal tax rate, and exploiting workers to the max becomes a more attractive strategy.
I don't really think this is an important effect. But if you believe that corporations are going to share the benefits of tax cuts with workers out of the goodness of their hearts, you have to acknowledge that the price of a good heart has actually gotten higher, not lower, thanks to these tax cuts – because as conservatives like to remind us, it's the marginal rate that matters.
So are workers going to benefit a lot from these tax cuts? There was never a very good reason to think they would, and early
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