The White House is making a promise: The average American family would get a $4,000 raise under President Trump's tax plan.
Critics have slammed the plan as a giveaway to the wealthy, but the White House fought back Monday, releasing a white paper from Trump’s Council of Economic Advisers that argues that reducing the top corporate tax rate from 35 percent to 20 percent would boost middle-class incomes substantially.
“I would expect to see an immediate jump in wage growth,” said Kevin Hassett, head of the council.
The average household brought home $83,143 in income last year. Hassett predicts that would increase by $4,000 to $9,000 a year from reducing business tax rates alone (families that earn less will see a smaller increase). Trump also wants to slash personal income tax rates, but Hassett says there aren't enough details yet to forecast those benefits.
Trump has seized on the $4,000 figure as proof that his plan would help the middle class. He talked it up in a speech to truckers last week in Harrisburg, Pa., a key swing state in the election. But nearly 60 percent of Americans think Trump's tax reform favors the rich, according to a CBS News poll released Sunday.
Wage growth has been disappointing since the Great Recession, rising about 2 percent a year, which is well below the nation's historic average of 3.5 percent to 4 percent a year. Hassett estimates that wage growth will skyrocket to more than 5 percent a year after the tax plan is enacted, although it may take a few years to fully kick in. He said the nation's competitors with lower tax rates experience faster wage growth (see chart below).
The Republican tax bill faces a critical hurdle this month: The Senate must pass the 2018 budget. Congress can’t advance a tax plan until the budget passes both legislative chambers. The only other option is to get a bipartisan tax bill passed, but Democrats don't appear eager to sign onto it.
The president is trying to rally GOP votes by stressing how the middle class will gain from tax cuts. He golfed Sunday with Sen. Rand Paul (R-Ky), a likely swing vote on the budget and tax bills.
Critics say the White House is exaggerating how much working people will benefit. Former treasury secretary Lawrence Summers, a Democrat, called the Trump administration claims "dishonest" and "an absurdity" on CNBC.
After President Ronald Reagan's 1986 tax reform, weekly wages for rank-and-file workers declined. More recently, companies have earned large profits, yet they have barely increased worker wages at all.
“It's irresponsible to overhype the claims,” said Len Burman, co-founder of the Tax Policy Center, a think tank, and a Treasury official under President Bill Clinton. “There's just not any evidence that there's a huge effect on wages or economic growth” if you cut business taxes.
Burman's research has found that the vast majority of the benefits of a corporate tax cut will go to the wealthy. But many right-leaning scholars, including Hassett, say it will be a boon to the middle class.
Hassett, who earned his PhD in economics from the University of Pennsylvania, is one of the biggest champions of the view that tax cuts spur growth and higher wages. It's a concept known as “supply-side economics,” which many Republicans have embraced, including Reagan.
According to Hassett, companies save more money when their tax bills go down and some of that money is likely to go into the hands of workers. Hassett says companies usually end up taking some of their tax savings and investing it in better machines and technology. That makes workers more productive and more valuable to companies, so business pay them more.
“I would expect capital spending to really take off if the tax bill passes,” Hassett said. He also forecasts more manufacturing jobs in the United States as companies build more factories here.
In addition to cutting rates to 20 percent, Trump's tax plan also requires companies to bring back more than $2 trillion in cash held in overseas accounts. Hassett argues once that money returns to the United States, it will cause even more investment and wage growth.
Although right-leaning economists tend to agree with the White House, there are many skeptics. Goldman Sachs also did a recent review of economic studies on this issue. Unlike the White House, Goldman Sachs found only “modest” effects on wages and growth, if that, from the tax plan.
Alan Auerbach, a professor of economics and law at the University of California at Berkeley, taught Hassett in graduate school and is cited in the White House's white paper. Auerbach says business tax cuts can increase wages “under some circumstances.” But he does not think that simply cutting the rates from 35 percent to 20 percent is enough.
Trump and Congress have to get the tax recipe right if they really want to have a good chance at boosting middle-class wages. Auerbach says there are two things lawmakers should do. First, they need to ensure the tax bill doesn't add to the nation's $20 trillion debt. Second, they need to give businesses incentives to spend money on better machines and equipment.
What we know of Trump's tax plan is that it checks the box for investment incentives. It has provisions such as allowing companies to deduct the cost of building a new factory right away and mandating that they bring back money held overseas to the United States.
But the plan also probably would add $1.5 trillion to the debt. That's harmful on a lot of levels, economists say. It would encourage investment money to go to finance the government debt instead of private companies, and it means the United States probably would have to raise taxes down the road.