Tuesday, May 1, 2018

Paul Krugman Explains Why Tax Cuts Don't Raise Wages

The major thrust of the Republican tax bill was to cut taxes for US corporations.  Of course, that does not excite most voters who want something for themselves.  Republicans always promise their voters that tax cuts will produce more jobs and increase their wages.  They defended the corporate tax cuts by claiming that corporations would increase investment spending.  That would stimulate economic growth and raise their wages.  Paul Krugman describes how that process would work if indeed corporate executives increased business investment.  So far, however, corporations have not used the influx of cash to increase business investment.  Consequently, the tax cuts have not had much of an impact on job growth or wage increases.  Corporations have used most of their cash influx to buy back their own stock and to increase dividend payouts.  That has been good for shareholders and corporate executives, who are also large shareholders, but it has not done much for most Americans who are not large shareholders.

Most economists are not surprised by this result.  Corporations tend to make capital investments when the expected return on investment exceeds the interest rate.  Interest rates have been low and corporate profits have increased retained earnings which might also be used to fund investment. They were not waiting for extra cash from tax cuts to make capital investments. They could also fuel growth through mergers and acquisitions instead of making capital investments. 

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