Suggested savings from proposed federal tax cuts come with caveats

It’s a number that’s also recently been cited by White House Press Secretary Sarah Huckabee Sanders, who tweeted Oct. 22, “The average American family would get a $4,000 raise under the President’s tax cut plan. So how could any member of Congress be against it?”

The $4,000 figure was significantly higher than calculations done by KPC Media Group in a story published Oct. 15, which showed tax reform could save a married couple with no dependents about $780 per year or a single person about $228 per year, based on median incomes in the region.

So where’s the difference?

We reached out to Banks’ office and Indiana economists for some clarification on the number.

Where $4,000 comes from

When asked about the estimates Banks was referring to when he cited the number, his office staff pointed to a study from the Council of Economic Advisers, an office of the White House.

The 14-page report, titled “Corporate Tax Reform and Wages: Theories and Evidence,” makes the case that cutting the U.S. corporate tax rate from 35 percent to 20 percent would create additional wage growth for American families.

“Reducing the statutory federal corporate tax rate from 35 to 20 percent would, the analysis below suggests, increase average household income in the United States by, very conservatively, $4,000 annually,” the introduction of the report states.

The report focuses on a gap in wage growth between nations with high corporate tax rates against those with lower statutory tax rates. The council states that wages for workers in U.S. corporate jobs fall by 0.3 percent for every 1 percent gain in the corporate tax rate.

Based on that information, income for the average family would rise somewhere between $4,000 and $9,000, if the corporate income tax rate were slashed.

The conclusion is based on the premise that businesses would increase wage growth by an additional 2 percent above and beyond current levels, due to the savings received from the tax cut as well as changes that would incentivize businesses to bring profits back to the United States instead of banking them overseas.

The report does not detail the effects on “pass-through entities,” a tax status that many small businesses file under, but the Trump administration has proposed cutting those rates, too. Pass-throughs can pay a tax rate as high as 39.6 percent, which could be cut to 25 percent.

Some issues with the numbers

One of the most immediate issues that arises with the analysis is that the estimated increase in income is based on an average that is much higher than what workers in northeast Indiana typically earn.

“Using 2016 household income as the baseline, these effects translate into an increase in average household income from $83,143 in 2016 to between $87,520 and $92,222, an increase of $4,000 to $9,000 in wage and salary income alone,” the Council of Economic Advisers report states.

According to U.S. Census data, median incomes in the four-county area are significantly lower: about $27,000 for singles, about $49,000 for households with no dependents and about $64,000 for married couples with dependents.

Based on the report, the low-end estimate constituted an increase of 5.26 percent. Applying that to incomes in the four-county area suggests a single person would get an increase of $1,415, a household with no dependents would see an increase of $2,579 and a married couple with children would get $3,375 more.

The estimates of wage growth also seemed high to Michael Hicks, director of the Center for Business and Economic Research at Ball State University, who said he knows the economists who worked on the White House report.

Hicks called the $4,000 estimate “rosy,” but likewise stated a competing analysis from the Tax Policy Center that showed little to no increases was overly pessimistic. Hicks said he believes tax cuts could lead to some increases in personal wealth — whether through increased business investment, increased wages or increases in stock investment, since a vast majority of stock-market capital is held in pensions and 401(k)s — but the effect is likely to be more middling.

“They’re on the high range of plausible,” Hicks said. “It’s not a crazy assumption, but it’s higher than one I would employ.”

No guarantee on wage increases

The additional income families would see is based on the assumption that the tax cuts would lead to an additional 2 percent increase in wage growth, but there’s no mechanism to guarantee that firms would hit that targets.

Potentially, a company could take the money saved through tax reform and use it for a variety of other purposes, such as business expansion, increased dividends to shareholders, supporting political action committees or, simply, banking the money for future use.

“(A tax rate cut) does not reward the behavior that you want. It makes possible the behavior that you want, but it also makes possible lots of other behaviors,” said Morton Marcus, an Indiana economist and columnist formerly with the Indiana University Kelley School of Business. “Cutting the rates does not lead firms to raise wages necessarily or do anything else necessarily. They can do what they want with the money.”

When asked, Banks’ office provided another news release citing a survey from the National Association of Manufacturers about what firms might do if corporate tax reform is passed.

Of the firms surveyed, 52.2 percent said they would likely “increase employee wages and benefits.”

The White House report also only cites wage changes on corporate tax rates, so effects on smaller businesses with smaller profit lines are not detailed. According to the Small Business and Entrepreneurship Council, 89.7 percent of U.S. businesses have fewer than 20 workers.

The proposal also would have little effect on employers that don’t pay taxes — governments, schools or a not-for-profit hospital, for example. They would not see any direct savings from cuts in the business tax rate, Marcus said.

A targeted tax incentive, like a tax break for companies that can prove they’ve increased wages or added jobs, might be more effective, since it only would reward firms that accomplish the intended behavior, Marcus said.

Tax savings versus income growth

Part of the discrepancy between the figures cited by KPC Media Group and by Banks is that they involve two different things.

The KPC analysis was based on differences in tax burdens under the current code versus what they would be under the new plan. It would be nearly impossible to achieve $4,000 in savings just by using personal income tax reform alone.

The income tax burden for singles or married couples without kids doesn’t even hit $4,000 per year. Middle-class taxpayers could see a few hundred dollars in savings if the standard deduction is doubled and the tax rate lowered from 15 percent to 12 percent.

The $4,000 cited by Banks is based on potential income growth that could occur as a side effect of cutting taxes. That’s a different source of money, one that could be an indirect benefit of tax cuts.

Hoosiers could see a few thousand dollars more from the combination of direct and indirect effects, but it’s likely not going to be as high as advertised, Hicks said.

“There is no doubt that taxes matter and tax increases on average will reduce wages and distribution of income by businesses, and that tax cuts will increase them. The question is, how much and for whom?” he said.