By: Tim Worstall
Date: 4 August 2014
How to raise wages: cut corporation tax
We’d all like to see wages rise: that is the point of this economy
thing, after all, that the average life of the average bloke just keeps
getting better and better. So, how might we go about doing this lovely
thing? Well, some interesting research from the US as to the effects of
eliminating (or, if not, at least lowering) the corporation tax rate:
This is not, we should note, about patent boxes, about freeing foreign income from UK taxation or any of that sort of stuff. This is the effect simply of lowering the rate upon profits made inside the UK. Jobs created would go up and, given that the closer we get to full employment the higher wages rise, wages will indeed then go up.
This finding is simply the mirror image of the standard point that capital and corporate taxes have higher dead-weight costs than most other forms of taxation. Any tax means that some economic activity doesn’t take place but different taxes destroy, for the same revenue raised, different amounts of economic activity. We would therefore, for whatever amount of revenue we want to raise, prefer to destroy the least amount of economic activity. Which means lowering corporation tax, as above, even if that means higher taxes on consumption or property to still collect the same revenue.
We adopt a dynamic stochastic occupational choice model with heterogeneous agents and evaluate the impact of a potential reduction in the corporate income tax on employment. We show that a reduction in corporate income tax leads to moderate job creation. In the extreme case, the elimination of the corporate income tax would reduce the non-employed population by 5.4 percent. In the model, a reduction in the corporate income tax creates jobs through two channels, one from new entry firms and one from existing firms changing their form of legal organization. In particular, the latter accounts for 85.7 percent of the new jobs created.
This is not, we should note, about patent boxes, about freeing foreign income from UK taxation or any of that sort of stuff. This is the effect simply of lowering the rate upon profits made inside the UK. Jobs created would go up and, given that the closer we get to full employment the higher wages rise, wages will indeed then go up.
This finding is simply the mirror image of the standard point that capital and corporate taxes have higher dead-weight costs than most other forms of taxation. Any tax means that some economic activity doesn’t take place but different taxes destroy, for the same revenue raised, different amounts of economic activity. We would therefore, for whatever amount of revenue we want to raise, prefer to destroy the least amount of economic activity. Which means lowering corporation tax, as above, even if that means higher taxes on consumption or property to still collect the same revenue.
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