Lower corporate taxes boost jobs and wages

Ike Brannon writes at Cato:

Andrew and I reviewed the economic studies pertinent to this question and the evidence suggests that a lower corporate tax rate boosts employment and wages.

Put briefly, there are two different strands in the literature pertinent to this question: One strand studies the question via different corporate tax rates at the state level while the other looks at corporate tax rate differences across countries.

We believe that the state corporate tax rate differences are most relevant for understanding how a corporate tax rate reduction at the federal level may impact labor markets, because the economic environment is—of course—the same as it would be for federal rate changes.

Comparing between states is better than between countries because different countries can have many other confounding variables.

The research is by no means unanimous of course, but the most relevant studies by our account (most notably by William Harden and William Hart) find that a one percentage point increase in the corporate tax rate would increase unemployment by .2%-.5%. A 10-20% reduction in the rate—the range that the Trump Administration has proposed— would translate to a 2%-10% boost in long-run employment.

So which parties in New Zealand will campaign to cut the corporate tax rate and boost jobs and wages?

The impact on income is of a similar magnitude: The studies we find most compelling (by Alexander Ljungqvist and Michael Smolyansky, as well as Harden and Hart) suggest that a one percentage point reduction in the corporate income tax would boost income by .3% to .6%; for the 10-20% rate reduction on the table, that translates to a long-term boost in income of 3%-12%.

Cutting the NZ corporate tax rate from 28% to 20% would only cost a bit over $2 billion a year.

Comments (20)

Login to comment or vote

Add a Comment