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Posts Tagged ‘Wages’

Some economic statistics are very important in the world of politics.

When President Obama’s so-called stimulus was in effect, critics (including me) kept pointing to higher-than-predicted unemployment rates. President Trump, meanwhile, mistakenly thinks America somehow is losing because of the trade deficit. And the GDP numbers are the subject of considerable discussion on all sides.

Another very important piece of data is wage growth, especially since Trump wants to claim his policies are generating big results. I take a jaundiced view on such claims, but the issue is very important, so let’s take a look at two interesting columns.

Michael Strain of the American Enterprise Institute, writing for Bloomberg, starts by noting that some folks on the left think workers are being screwed.

Are wages determined by market forces, or do businesses get to decide what pay they offer to workers? …Why has wage growth been so sluggish for so many years? …you might answer that employers have made the decision to boost profits at the expense of raising wages. …it is common to hear some prominent analysts and organizations on the left argue that the link between wages and productivity for most workers has effectively been severed.

Not so fast, he writes.

Businesses don’t pay employees less than the value of their productivity — the amount of revenue workers generate for their employer — because doing so would result in their workers taking another job where they would get paid what they’re worth. In this sense, employers don’t “decide” what wages they pay. Instead, wages are set in markets. …worker productivity remains the dominant force in setting wages. …Market forces are powerful. A recent paper by economists Anna M. Stansbury and Lawrence H. Summers of Harvard confirms this. They find that over the last four decades, a one-percentage-point increase in productivity growth is associated with a 0.73 percentage point increase in the growth rate of median compensation. That’s a strong link.

I have two thoughts on this. First, productivity is the key to our prosperity. I’m in full agreement with Paul Krugman’s observation that, “Productivity isn’t everything, but in the long run it is almost everything.”

Second, as illustrated by this chart, we get more productivity with greater levels of investment.

The problem is that government often undermines productivity growth.

Governments have thrown a wrench in the market machine through the absurd proliferation of occupational licenses, reducing wages for workers who can’t get a license and restricting the mobility of licensed workers. A recent study finds that the rate of migration across state lines for individuals in occupations with state-specific licensing requirements is over one-third lower than among individuals in occupations that don’t have such rules.

Amen.

And there are plenty of additional policies that have a negative effect as well.

In a column for the Wall Street Journal, David Henderson says the data on wage growth tell an incomplete story.

Standard wage data show that between the spring of 2017 and the spring of 2018, real wages in the U.S. increased only 0.1%. But there are three major problems with these data. First, they don’t account for fringe benefits, which are an increasing proportion of employee pay. Second, standard wage data use an index that overstates the inflation rate. Third, each year the composition of the workforce changes, as older, higher-paid workers retire and young, lower-paid workers enter the workforce.

He digs into some of the data that have been shared by the CEA.

…the White House Council of Economic Advisers addresses these three biases and concludes that real wages grew by 1% in 2017-18, not the measly 0.1% reported in the wage data. …including benefits would add 0.2 percentage point to the 2017-18 figure. …An alternate measure of inflation, the personal- consumption-expenditures price index, while also imperfect, is a better measure of inflation. Economists at the Federal Reserve prefer the PCEPI to the CPI. Using the PCEPI adds 0.5 percentage point to the 2017-18 growth of real wages. …The Census Bureau estimates that 3.57 million people turned 65 in 2017, compared with 2.68 million in 2010. Taking account of the decline in older, higher-paid workers and the increase in younger, lower-paid workers, the CEA estimates that this “composition factor” added 0.3 percentage point to real wage growth from 2017-18.

I have two thoughts about this data.

First, I don’t pretend to know the ideal measure to capture inflation, but I definitely know that we’d have lower prices in the absence of government intervention.

Second, the CEA definitely is right about fringe benefits being an ever-larger share of total compensation (mostly driven by government intervention).

And these observations apply, regardless of who’s in the White House.

This is not a partisan point. The same methodology would show that real wages grew more than was reported during much of President Obama’s time in office. …there is, in this context, one relevant difference between the Trump and Obama administrations: the 2017 tax cut. Real after-tax wages increased 1.4% between 2017 and 2018, according to the CEA study.

I obviously like the part about tax cuts being helpful, but I’ll reiterate my concern that this effect will evaporate if GOPers don’t get serious about spending restraint.

And I’ll close with the essential observation that there is no substitute for across-the-board pro-market policies if the goal is improving people’s lives.

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Congratulations to Belgium. According to the new edition of Taxing Wages, average Belgian workers have the dubious honor of surrendering the biggest chunk of their income to government. No wonder part of the country is interested in secession.

We can also give (sincere, this time, rather than sarcastic) congratulations to New Zealand and Switzerland, which impose the lowest overall tax burden on the labor income of average workers (with honorable mention to Chile and Mexico for low tax burdens in developing countries).

Here’s the key data, which shows how much of an average worker’s wages are lost because of income and payroll taxes.

The United States, I’m happy to report, is in the bottom half, which means the government confiscates a below-average amount of money from workers.

Other nations with onerous burdens include Germany, Italy, and France

Regarding the Belgian tax burden, the government understands this is bad news for Belgium’s economy, so there are periodic discussions about reducing the tax burden on labor income. Unfortunately, the potential “reforms” tend to be senseless tax swaps which would involve higher taxes on consumption or higher taxes on capital.

In the former case, the government would take more money as income is spent, so workers wouldn’t benefit. And in the latter case, there would be less investment, so workers wouldn’t benefit since their pre-tax wages would suffer.

The bottom line is that it’s impossible to have a good tax system with a bloated government.

By the way, the previous chart looked at the tax burden on the average worker with no children. Some countries have preferential tax policies for households with kids.

Here’s that data. Belgium still wins the Booby Prize for highest tax burden. But there are some noteworthy difference. Households with kids enjoy significantly lower tax burdens in Germany, France, Luxembourg, Ireland, Portugal, Slovenia, and the United States.

But you probably don’t want to have kids in Canada, Australia, and New Zealand.

Let’s close with a couple of caveats.

First, we’re only looking at one slice of tax policy.

More specifically, this OECD data measures the tax burden on labor income, and it looks at that data only for middle-income workers.

It’s also important to consider tax rates upper-income taxpayers since they tend to be the entrepreneurs and job creators. From this perspective, Belgium had the second-worst tax system for these households, slightly behind Sweden.

Nothing to brag about.

It’s also important to consider the overall tax burden on saving and investment. And there are several ways of looking at that data.

As you can see, Belgium doesn’t get high marks in these indices, but the United States invariably scores poorly.

Last but not least, there are many other policies – such as trade, regulation, and the rule of law – that also help determine a country’s competitiveness.

And while Belgium and other European nations have bad fiscal systems, they tend to score highly in other areas. Same for the United States.

The real key, of course, is to get good scores in all areas, like Switzerland, Hong Kong, and Singapore. Those are the best jurisdictions for workers, with good wages and low tax burdens.

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The most common arguments for reducing the 35 percent federal tax on corporate income usually revolve around the fact that having the developed world’s highest tax rate on business undermines competitiveness and reduces investment in America.

And all of that is true. But we should never lose sight of the fact that the corporate income tax is merely a collection device. Businesses may pay the tax, but the real burden is borne by people.

  • Shareholders (investors) receive lower dividends.
  • Consumers pay more for goods and services.
  • Workers receive lower levels of compensation.

Politicians don’t really care about investors since some shareholders are rich, but they definitely pay lip service to the notion that they are on the side of consumers and workers.

So I think this new study from German scholars is worth sharing because it measures the effect of corporate taxation on wages. Here are some of the highlights.

In this paper, we revisit the question of the incidence of corporate taxes on wages both theoretically and empirically. …we exploit the specific institutional setting of the German local business tax (LBT) to identify the corporate tax incidence on wages. …we test the theoretical predictions using administrative panel data on German municipalities from 1993 to 2012. Germany is well suited to test our theoretical model for several reasons. First, we have substantial tax variation at the local level. From 1993 to 2012, on average 12.4% of municipalities adjusted their LBT rates per year. Eventually, we exploit 17,999 tax changes in 10,001 municipalities between 1993 to 2012 for identification. …Moreover, the municipal autonomy in setting tax rates allows us to treat municipalities as many small open economies within the highly integrated German national economy – with substantial mobility of capital, labor and goods across municipal borders.

And here are the key results. There’s a good bit of economic jargon, so the main takeaway is that 43 percent of the corporate tax is borne by workers.

For our baseline estimate, we focus on firms that are liable to the LBT. Figure 2 depicts the results. Pre-reform trends are flat and not statistically different from zero. After a change in the municipal business tax rate in period 0 (indicated by the vertical red line), real wages start to decline and are 0.047 log points below the pre-reform year five years after the reform. The coefficient corresponds to a wage elasticity with respect to the LBT rate of 0.14. …this central estimate implies that a 1-euro increase in the tax bill leads to a 0.56-euro decrease in the wage bill. …we have to rely on estimates from the literature to quantify the total incidence on labor. If we assume a marginal deadweight loss of corporate taxation of 29% as suggested by Devereux et al. (2014), 43% of the total tax burden is borne by workers. This finding is comparable to other studies analyzing the corporate tax incidence on wages (Arulampalam et al., 2012; Liu and Altshuler, 2013; Su´arez Serrato and Zidar, 2014). …We find that part of the tax burden is borne by low-skilled workers. …the view that the corporate income tax primarily falls on firm owners is rejected by our analysis.

For what it’s worth, I use a different approach when trying to explain the impact of the corporate income tax.

I state that shareholders pay 100 percent of the corporate income tax when looking at the direct (or first-order) effect.

However, since shareholders respond to this tax by investing less money in businesses, that means productivity won’t grow as fast, and this translates into lower wages for workers (compared to how fast they would have grown if the tax was lower or didn’t exist). This is the indirect (or second-order) effect of corporate taxation, and it’s akin to the “deadweight loss” discussed in the aforementioned study.

And this is also the approach that can be used to calculate the damage to consumers.

For today, though, the moral of the story is very simple. A high corporate tax rate is bad for growth and competitiveness, but one of the main effects is that workers wind up earning less income. So when the class-warfare crowd takes aim at “rich corporations,” there’s a lot of collateral damage on ordinary people.

P.S. For more information, here’s a video from the Center for Freedom and Prosperity that describes some of the warts associated with the corporate income tax.

P.P.S. There’s lots of evidence – including some from leftist international bureaucracies – that a lower corporate tax rate won’t mean less tax revenue.

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