Economic Effects of the Corporate Tax Rate Reduction

Contrary to some commentators’ perceptions, the economic case for corporate tax rate reduction does not involve the hope that corporations will “use” their tax savings to make additional investments, pay higher wages, or hire additional employees. Profit-maximizing corporations look at the anticipated tax savings from their decisions, not the tax savings they have already reaped from previous actions. The economic theory also does not assume any altruism or social responsibility by corporations. Instead, the economic case for corporate tax rate reduction relies on corporations’ response to incentives. The rate reduction will prompt self-interested corporations to make additional investments to obtain larger tax savings from the rate reduction. The additional investment will make workers more productive and therefore more valuable to employers. Competition by employers to hire additional workers will force employers to pay higher wages. The additional investment and the increases in productivity and wages will occur over several years. However, those effects may be partially or wholly offset for a deficit-financed corporate tax rate reduction, because the additional government debt will push up interest rates and reduce investment. Also, a complete accounting of the rate reduction's effects must include the future tax increases and spending cuts that will be adopted to service the debt.