Finance

Tax cut supporters should stop talking about corporate bonuses

In the weeks since the new tax law was enacted, well over 100 companies have granted one-time bonuses to their employees while citing the new law's reduction in the corporate income tax rate as part of the reason. The president, key members of the House and Senate, and many other supporters of the new tax law have hailed the bonuses as proof that the corporate rate cut is boosting wages. Unfortunately, their argument is misdirected and undermines the real economic case for corporate tax rate reduction.

Even if the bonuses were prompted by the corporate rate cut, they are merely one-time steps taken by a limited number of companies for public relations purposes. Such steps look nothing like the long-lasting, economy-wide wage gains arising from the self-interested responses of companies to the investment incentives created by the tax rate reduction. Supporters of the corporate rate cut should focus on those long-run gains rather than tying their case to the short-lived corporate public relations initiatives.

According to economic theory, a corporate tax rate reduction raises wages by boosting investment and productivity. Here's how it works. Reducing the tax rate on a company's taxable income gives it an incentive to earn more taxable income by expanding their factories, equipment, and other business capital in the United States. It is in a company's self-interest to expand their U.S. investments because the rate cut lets them keep more of the profits of those investments.

With more capital augmenting their output, American workers become more productive and therefore more valuable to employers. Companies throughout the economy then compete against each other to hire more workers, bidding up their wages. These dynamics - the expansion of the capital stock and the resulting increases in productivity and wages - are likely to play out over a number of years after the rate cut takes effect.

The timing of the bonuses makes clear that they do not fit the economic theory's depiction of productivity-driven responses to the tax cut. The one-time bonuses give workers extra money now, although it is too soon for the tax cut to have increased investment and raised productivity, but offer workers nothing in upcoming years, when the tax cut would have had time to push up productivity.

The bonuses may be a public relations response to the corporate tax cut, possibly even an attempt to curry favor with the Trump administration. Or, the bonuses may be due to the ongoing economic expansion and labor market tightening, with companies attributing them to the tax cut for public relations purposes.

Either way, the one-time bonuses cannot undergird a convincing case for the corporate tax rate cut. Public relations initiatives will not produce lasting or widespread wage gains because companies will not long pay workers more than is warranted by their productivity. Unsurprisingly, the large majority of the nation's companies have not announced bonuses. Any argument that relies on the ever-shifting public relations strategies of companies will lead Americans to conclude that worker gains from the corporate tax cut are meager and short-lived.

Supporters of the corporate rate cut should stop talking about the one-time bonuses. Instead, they should reiterate the real economic argument for corporate tax rate reduction. They should explain that the incentives created by the lower tax rate will prompt self-interested companies to invest more and that the ensuing competition to attract workers will force companies to pay higher wages. Most troubling, supporters who cite the bonuses as proof that companies are "using" their tax savings to raise worker pay are framing the issue in a way that suppresses the central role of incentives.

The economic case for corporate tax rate reduction is not based on how companies "use" their tax savings. It is based on how companies change their behavior in order to obtain larger tax savings and how those behavioral changes affect the demand for workers throughout the economy. The corporate tax rate cut is designed to boost economic growth, not spur public relations initiatives. If supporters of the tax cut don't remember that, who will?

Alan D. Viard is a resident scholar at the American Enterprise Institute, where he studies federal tax and budget policy. He previously served as an economist at the Federal Reserve Bank of Dallas, the White House Council of Economic Advisers and the United States Joint Committee on Taxation.

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