Friday, January 19, 2018

Who Benefits from the 2017 Tax Reform? Workers Gain from Rapidly Expanding Economy

Republicans argue that implementation of the recently passed tax reform bill will stimulate economic growth, which will benefit the middle class, primarily by boosting wages and salaries. Democrats, on the other hand, contend that the benefits of any growth will flow mainly to the "rich" via higher corporate profits.

Does empirical data support the Republican or Democrat position assuming that the package, as advertised, raises GDP growth from 2016's 2.1% to 3.1%, or even 4.1%?

In 2016, the U.S. economy ended the slowest eight years of economic growth since the end of the Truman Administration in 1952. During this period of slow GDP growth, wages and salaries as a share of GDP dropped from 44.5% to 43.5%, but profits as a percentage of GDP climbed from 9.4% to 11.5%. Thus, superficially during this latest time period, slow growth had more of a negative impact on workers via lower wage and salary growth.

The accompanying table lists the GDP, wage & salary, and profit growth from 1947 to 2016. During this period, when GDP growth moved from an average of 2.4% to 4.6%, wage and salary growth advanced from 4.1% to 8.2%, but profit growth fell from 6.4% to 5.1%.

Calculating correlation coefficients for the data indicate a clear positive correlation between growth rates of GDP and wages & salaries (+0.74), but a negative association between GDP growth rates and profits (-0.29).

Theoretically, this empirical finding is consistent with the likelihood that businesses are required to bid up wages during periods of rapid growth with the result of lower profits. To quote British economist David Ricardo, "There can be no rise in the value of labour without a fall of profits."

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