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How Corporate Tax Cuts Benefit Consumers and the ‘Little Guy’

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Unread 02.09.18, 01:49 PM
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How Corporate Tax Cuts Benefit Consumers and the ‘Little Guy’

On 02.09.18 11:49 AM posted by Gary Wolfram

Since Republicans passed the*tax*bill last December, the country has seen a wave of hand-wringing and hysteria.

Sen. Elizabeth Warren, D-Mass., gave voice to the opinion of many when she recently*declared*that the Republican*tax*plan is*“the biggest*tax*giveaway to giant corporations in modern memory.”

But if we really want to get our heads around the Republican*tax*bill, our best guide comes not from contemporary histrionics, but historic economic analysis.

In 1848, French economist Frederic Bastiat wrote a famous paper, “What Is Seen and What Is Not Seen.” In it he*stated:
There is only one difference between a bad economist and a good one: the bad economist confines himself to the*visible*effect [of an institution or law]; the good economist takes into account both the effect that can be seen and those effects that must be*foreseen.

The problem with Warren’s claim is that it*is a classic case of what Bastiat is talking about: noticing what is seen while ignoring the unforeseen.*If we’re going to have a substantive debate on*tax*policy, we must take into account what is unforeseen.

And that principle doesn’t just apply to Republican*corporate*tax*cuts. It applies to Democrat*tax*increases as well.

When the government levies a*tax*on corporations, that is not the end of the story. There are all kinds of other consequences. The*tax*will affect the return that corporate-sector industries make from producing, which will lead to less production.

Less production in the*corporate*sector will drive up the price of goods that consumers purchase from corporations. So the tax burden placed on corporations actually falls on consumers in the form of higher prices.

What’s more, with less being produced in the*corporate*sector there is less need for labor, and when the demand for workers is reduced, wages will fall. Thus, some of the*tax*levied on corporations will be borne by workers.

>>>*Government Scorekeepers Are Wrong. Corporate Tax Reform Would Mostly Help Workers, Not the Rich.

The degree to which laborers will feel that burden depends upon a number of things, including their ability to move to other areas such as the noncorporate*sector.

But if workers are able to move to the noncorporate*sector, then the supply of workers in the noncorporate sector rises, which in turn will drive down wages in that sector. So part of the*tax*will be borne by workers in the noncorporate*sector.

The important point to take from all this is, of course, that policy is never as simple as direct cause and direct effect. One has to consider all of these effects and more when crafting and implementing laws.

So what, then, are the effects of the Republican*tax*plan?

Currently, the U.S.*corporate*tax*rate is the highest in the industrialized world. The visible effect of the Republican*tax*plan is to cut that rate from 35 to 21 percent, bringing the U.S. rate down to the average of European countries.

This will make investment in the United States more attractive and will increase the competitiveness of our corporations worldwide.

>>>*5 Myths About Tax Reform, and Why They’re Wrong

If one simply looks at the direct effect, it does appear that the beneficiaries of the*corporate*income*tax*rate will be the corporations themselves. If one attempts to foresee the invisible results, however, the same economic effects outlined above will occur, but in reverse:*The reduced costs of producing in the*corporate*sector will lead to greater output, lower prices for consumers, and increased wages for workers.

In 2012,*a Tax*Foundation survey of the economic journal literature found that every study published in the prior 15 years found taxes had negative effects on economic growth, and studies that distinguished between different types of taxes found that the*corporate*income*tax*had the largest negative effect.

One may certainly debate the degree of these positive effects and the time it will take for them to fully flow through the economy.*But the issue of cutting the*corporate*tax*rate to make our country competitive with other nations should not be dismissed as a giveaway to corporations.

Rather, voters should think through how it*actually affects the amount of production, investment, prices, and wages—and that means doing what Bastiat suggests and looking for the effects that are unforeseen.

The post How Corporate Tax Cuts Benefit Consumers and the ‘Little Guy’ appeared first on The Daily Signal.

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