Trump Tax Cuts Gave Workers a Sugar High

(Bloomberg Opinion) -- When President Donald Trump signed the Tax Cuts and Jobs Act into law in December 2017, his administration said it would benefit regular Americans — in large part by boosting their wages.

The verdict more than a year later: To some extent it might have worked, but not for the right reasons.

Wages have accelerated in recent months. The Labor Department estimates that average hourly earnings stood at $27.56 in January, up 3.2 percent from a year earlier. That’s still short of the pace that prevailed ahead of the last recession, but a lot better than the average 2.5-percent growth of the past five years:

What explains the gain? There are a few possibilities related to the TCJA’s steep corporate tax cuts. In order of increasing desirability:

• Companies could choose to share some of the extra cash with their workers — something various employers claimed to be doing after the tax cuts were passed. This would be a redistribution of money from the government to employees.
• The increase in the federal budget deficit could stimulate the broader economy, pushing up demand for workers. This would be temporary, and likely offset by subsequent measures to reduce the deficit and/or higher interest rates related to added government debt (though some doubt this).
• Lower tax rates could encourage companies to invest more, boosting their productivity and hence their ability to pay higher wages. This would be wonderful, enhancing the economy’s longer-term potential to grow.

The timing of the wage acceleration argues against No. 1: If companies were sharing the windfall in any big way, it should have happened earlier in 2018. That said, it’s consistent with No. 2, the stimulus story. The annualized pace of economic growth jumped to 4.2 percent and 3.4 percent in the second and third quarters of 2018, plenty to drive the stronger wage growth that appeared in the second half of the year.

What about the third option? In an encouraging sign, business investment and productivity have increased a bit. If this were trickling down to wages, though, one would expect raises to be most pronounced in the industries that received the biggest tax breaks. That hasn’t happened.

The TCJA affects different industries very differently: Total estimated tax savings from 2018 through 2027 range from 60 percent for mining to a 19 percent increase for utilities. Yet wage growth bears no correlation to the savings. Here’s how that looks for 16 industries for which the Penn Wharton Budget Model has made tax forecasts:

Granted, the change in wage growth might matter more than the level. So here’s the same chart showing the acceleration in wages from 2017 to 2018, in percentage points:

In both cases, the correlation is negative.

In other words, the most desired effect of Trump’s corporate tax cuts is very hard to find in the available data. So far, what we’re seeing is probably a sugar high driven by deficit spending. That’s not terrible, and could even undo some of the damage done by the last recession. But it’s not what the tax cuts are really supposed to achieve.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Mark Whitehouse writes editorials on global economics and finance for Bloomberg Opinion. He covered economics for the Wall Street Journal and served as deputy bureau chief in London. He was founding managing editor of Vedomosti, a Russian-language business daily.

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