EVAN HOROWITZ | QUICK STUDY
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The point of cutting corporate taxes, as President Trump frames it, is not just to boost economic growth overall, but also to help working Americans by sparking what he has called a “middle class miracle.”
With the US Senate taking the first steps to debating a tax bill, the Trump administration released a new analysis Monday to bolster its argument, suggesting middle income families would see a string of annual raises in the $3,000-$7,000 range if the corporate rate were reduced from 35 percent to 20 percent.
Not everyone is buying it. These rosy estimates depend on some unorthodox assumptions, and they don’t square with prior experience. Other corporate tax cuts in the US and around the world haven’t produced any clear benefit for workers, much less on this scale.
What’s more, even if the administration is right, it’s still a pretty convoluted way to help American workers. The full circuit is something like: reduce taxes for businesses, which makes the Unites States a more attractive place to invest, which could then boost productivity, making workers more valuable and worthy of better pay.
If the driving goal really is to fatten the paychecks of working Americans, there are more direct approaches. Here are just a few options, drawn from across the political spectrum.
Forcing business to pay higher wages is a pretty direct way to boost workers’ incomes. Right now, the federal minimum wage is $7.25 an hour, well below where it was in the 1960s and 1970s, after adjusting for inflation. There have been some increases at the state level — including in Massachusetts, where the minimum wage is now $11. Those recent increases really do seem to have increased take-home pay for low-income workers. And while setting the minimum wage too high might reduce hiring and ultimately cost jobs, we seem to be far away from that level.
The destiny of the US economy is most directly shaped by the Federal Reserve Board, at least over the short and medium term. Which means that one of the most consequential decisions facing Trump is selecting the next Fed chair. A Fed chief willing to keep the economy running hot by preserving low interest rates could have an especially positive impact on minority and middle-class workers, thanks to ready jobs, faster wage growth, and perhaps a historically low unemployment rate among black Americans. Trump, however, is rumored to favor several candidates who want to keep inflation at bay by raising interest rates — even if that means a slower economy and smaller raises for workers.
Despite all the encomiums to entrepreneurship and dynamism in the 21st-century economy, the truth is that established companies are more dominant today than they’ve been in decades. Since the 1970s, the country’s number of startups has fallen , which translates into less disruption, less competitive pressure to raise wages, and less need to lower prices. Quick fixes are few, but one option would be a change in antitrust policies, so that we stop encouraging mergers and maybe even break up companies that have become too dominant.
The only way to ensure long-term economic growth is to boost productivity, so that every year we can make more stuff even if our population isn’t growing. Business investment is certainly part of this, because workers with new machines and efficient processes can get more done. But it also helps to have creative, well-educated workers, and that requires public support for everything from early education to workforce retraining. Direct investments like these would also bring noneconomic benefits to everyday Americans, since better-educated people tend to have better health outcomes and commit less crime.
You can think of this as the shortcut to higher productivity. Instead of investing in early education and waiting for children to become working adults, you simply import already-educated people from other parts of the world. This could mean letting more eager, well-educated foreigners cross the border, but it’s also important to ensure they can ply their trade once they arrive. Right now, there are millions of immigrants who aren’t able to use their skills, because of restrictions that, for example, prevent foreign-trained doctors from practicing here, along with teachers, engineers, and many other licensed professionals. Easing these barriers might also help middle-class families more broadly, by reducing the cost of expensive services like health care and legal aid.
Common as it may be to lament the fast-paced, topsy-turvy nature of the modern economy, workers actually switch jobs less often than they used to, and they don’t move around the country as much as they once did. One big reason is that housing has gotten more expensive, making it more costly to resettle in high-productivity cities such as New York, Boston, or San Francisco. A touch from government could make it easier for middle-class families to take that next step up the professional ladder, whether it comes in the form of a direct subsidies for people who move, or pressure to make cities reduce zoning restrictions.
It’s not enough for the Trump administration to say — controversially — that corporate tax cuts will help the middle class. They also need to explain why we should take this circuitous route, hoping that a corporate windfall will trickle into bigger paychecks, when there are so many more direct approaches.
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