Cut Corporate Taxes to Boost Wages?

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Today's jobs report showed that average hourly earnings rose 0.2 percent in November, boosting the 12-month increase in earnings to 4.1 percent–the highest level since 2001. And last month's earnings report showed that average weekly earnings are up a robust 3.2 percent during the past year, taking inflation into account. But these data points are probably going to do little to cool concern about stagnant wage growth. Overall, it's been flat since mid-2003–though if you drill down a bit, you find that the average hourly wages fell 3 percent from June 2005 to September 2005. Since then, they've made up that loss with a couple of cents to spare.

To boost future wage growth, Democrats have suggested raising the minimum wage, making college more affordable, and tweaking the tax code to try to prevent U.S. companies from moving jobs overseas. Here's another idea, one it seems that only the GOP could love–but it was actually adopted by Spain's Socialist Party-led government earlier this year, Germany's Social Democrats in 2000, and Britain's Labor Party in 1999: Cut corporate income taxes.

The combined top federal, state, and local corporate tax rate in the United States is 39.3 percent, the second highest (after Japan) among the 30 countries of the Organization for Economic Cooperation and Development and 10.7 percentage points greater than the OECD average. Heck, even the welfare-state-loving Scandinavian countries–Sweden, Denmark, and Norway–have a combined average corporate income tax rate that is more than 11 percentage points below the U.S. rate.

How would cutting corporate taxes help workers? Because of the increasing global mobility of capital, owners can escape taxes by shifting capital overseas. That hurts domestic workers because "their productivity falls and they cannot emigrate to take advantage of higher foreign wages," as a new report (PDF) from the nonpartisan Congressional Budget Office explains. The study concludes that domestic labor bears slightly more than 70 percent of the burden of the corporate income tax. What's more, a 22-country study from the conservative American Enterprise Institute found that higher corporate tax rates lead to lower wages, with a 1 percent increase in corporate tax rates associated with a 0.7 to 0.9 percent drop in wage rates. "Lower corporate taxes will lead to higher wages over time," says Kevin Hassett, a coauthor of the study.

Reducing the U.S. corporate income tax rate might also make America a more attractive location for factories and headquarters. Ireland transformed itself into the "Celtic Tiger" after taking a shillelagh to its corporate rate, knocking it down to 12.5 percent from 43 percent. The economy started attracting loads of investment from around the world. It's expected to grow more than 5 percent this year, on top of 5.1 percent last year.

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