Did corporate tax cuts increase wages?

Analysis of U.S. and India corporate tax cuts post-pandemic, revealing limited impact on investment, employment, and wages.

In the years prior to the pandemic, two of the largest economies in the world — the U.S. and India — cut corporate tax rates in an attempt to stimulate growth. While the pandemic caused an unprecedented shock to the economy, enough time has passed for us to evaluate the effects of these tax cuts.

The Tax Cuts and Jobs Act was signed into law by former President Donald Trump on December 22, 2017, and went into effect from January 1, 2018.

While the act affected personal and corporate taxes, one of the most significant provisions was the reduction of the top tax rate on corporate income from 35 to 21%. Proponents of the measure held that the move would ensure that companies invest more, leading to an increase in growth and employment. The new investment would also cause an upgradation in technology and productivity, leading to an increase in wages as well.

In a recent publication titled ‘Lessons from the Biggest Business Tax Cut in U.S. History’ (published in the Summer 2024 edition of the Journal of Economic Perspectives), economists Gabriel Chodorow-Reich, Owen Zidar and Eric Zwick examine the effects of the tax cut. They find that the cuts did have a positive impact on investment, with a range of studies estimating an increase in investment of around 8 to 14%. Furthermore, studies suggest that based on investment trends, there would likely have been a fall in investment if the tax cuts were not passed.

This is not to say that the tax cuts were an unambiguously positive outcome. This is a relatively small increase in investment, implying a long-run increase in GDP of only 0.9%, and an increase in annual wages of less than $1,000 per worker. This is in stark contrast to the claims of an increase in wages of around $4,000 to $9,000 dollars advanced by the Council of Economic Advisors in favour of the move. Furthermore, the reduction in tax rates imply a long-run reduction in tax revenue of almost 41%. The fiscal health of the U.S. economy has been impaired at the cost of higher profits and a marginal increase in wages.

Tax rates for corporates were cut in September 2019 in India, with the rate for existing companies reducing from 30 to 22%, and that of new companies from 25 to 15%. This resulted in a tax revenue loss of around 1 lakh crore in 2020-21. This tax could nevertheless prove to be of net benefit to the economy if it resulted in an increase in employment and investment.

The pandemic led to severe dislocations in the labour market, leading to high unemployment. Unemployment has reduced since then, with labour force participation rates rising, particularly that of women. However, the corporate sector has had little to do with this increase. Much of the increase in employment has come in the form of insecure work, with unpaid family work showing significant increases in the rural sector. According to the PLFS, the share of workers with regular wage employment at the all-India level has fallen from 22.8% in 2017-18 to 20.9% in 2022-23. Furthermore, when comparing the periods July-September 2017 and July-September 2022, the average nominal monthly earnings of rural and urban regular wage workers displays a CAGR (compounded annual growth rate) of 4.53% and 5.75% respectively, which is barely above the rate of inflation. In real terms, rural wages for regular employment have reduced, with relative stagnation for urban wages.