Tax Reform Can Deliver Higher Paychecks to Households

The Council of Economic Advisers recently published a report reviewing several academic economic papers studying the incidence of the corporate income tax on worker wages. Over the last decade, a relatively new empirical literature has emerged to study this question, which consistently finds that a significant burden of the corporate income tax is borne by workers. The CEA report specifically cites a study published by the Federal Reserve Bank of Kansas City, and shows that the results from that study imply that a 1 percent increase in the U.S. state corporate income tax rate would lead to about a 0.1 to 0.2 percent decline in average wages. A mechanical application of that result shows that the proposed corporate tax rate cut in the Republican tax plan from 35 to 20 percent (a decline of 42 percent in rates) would lead to an approximately 4 to 8 percent increase in average wages. With average wages at approximately $50,000, as per data from the Bureau of Labor Statistics, this roughly implies a $2000 to $4000 increase in wages.