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Friday’s Jobs Report: Will the Tax Bill Create Jobs?

Andrew Chamberlain

Andrew Chamberlain, Author at Glassdoor US | Jan 2, 2018

Congress recently passed a sweeping $1.5 trillion tax cut bill. The legislation promises to affect the finances of millions of American workers and investors in the coming decade. But will it impact jobs and wages in the coming months? Friday’s December jobs report will provide some clues about the state of the labor market as we enter 2018, and how the new tax bill might -- or might not -- impact hiring and pay. Here’s what we’ll be watching for:

+191,000 new jobs added to nonfarm payrolls in December;
Unemployment rate down to 4.0 percent;
Average hourly earnings up 2.5 percent from one year ago;
Labor force participation rate steady at 62.7 percent.

Taxes, Pay and Jobs The federal tax bill passed in December enacts sweeping changes to federal taxes. Proponents of the bill argue it will create jobs and raise middle class wages. Opponents of the bill argue it mostly cuts taxes for wealthy companies and investors. Where do economists stand on the issue? As usual, the truth lies somewhere in the middle. On the one hand, the tax bill is projected to cut personal income taxes for about 75 percent of Americans who file taxes in 2018 -- including huge five-figure tax cuts for high-income households who take the standard deduction. It also radically reforms the rates and international reach of the corporate tax code, which could have a big impact on business investment. On the other hand, most of the tax cuts for individuals are temporary and will expire in 2025 unless Congress takes action. It also raises taxes for some households thanks to new limits on popular tax deductions like home mortgage interest and state and local taxes paid. Finally, it doesn’t really simplify federal taxes at all -- in fact, it adds new complexity in some ways. Two big questions economists are asking about the tax bill are: Will it encourage more hiring in 2018? And will it raise wages? Let’s take a closer look each of these questions. Impact on Hiring The U.S. economy today is close to full employment. Unemployment is hovering near a 17-year low. And there are a near-record 6 million open jobs nationally sitting unfilled thanks to a red-hot labor market that has employers struggling to find qualified workers to recruit. It’s hard to imagine any federal policy could do much to boost job growth in this environment. Average monthly job gains have already been slowing for years -- from a peak of 250,000 jobs added per month in 2014, down to 174,000 jobs per month in 2017 as of November. That’s not because the economy needs a boost. It’s because we’re on the precipice of full employment, and there are scant few workers available to hire as the economy marches through its eighth year of economic expansion. However, in 2019 and beyond, there are reasons to think the tax bill might encourage hiring beyond what it would otherwise be. For one, the bill gives a powerful jolt to business investment by allowing companies to fully expense or “write off” the full cost of new business investment -- that is, they can deduct money spent on new equipment and technology from their taxable income -- right away. Under current law, companies can only expense those costs slowly over years. That could cause capital-intensive industries like manufacturing, energy and transportation to expand their operations, creating new jobs for workers along the way. A second reason to expect some boost in hiring from the tax bill is that it will likely lift consumer spending -- at least once households see a few extra dollars in their paychecks in 2019. According to the New York Times, a married couple earning a combined $120,000 per year with two children will see a tax cut of about $3,400 when they file their 2018 taxes in early 2019. That’s a huge bump in take-home pay. If that prompts a surge in consumer spending -- which accounts for about two-thirds of economic growth -- that’s a second reason we might expect a bump in jobs in coming years from the tax bill. Will Wages Rise? The second big question many are asking about the tax bill is: will it raise wages? Critics of the bill argue it’s a “trickle down” shell game that will mostly cut taxes for wealthy shareholders, while proponents argue it will raise workers’ pay by sparking an economic boom and competition for talent. What can economic theory tell us about this debate? Economists teach that every tax is ultimately paid by people. Companies themselves are just a legal fiction, and can’t ultimately bear the burden of taxes. Instead, people pay them -- either shareholders through lower investment returns, consumers through higher prices, or workers in the form of lower wages. A famous 1962 paper by Arnold Harberger launched five decades of research about who ultimately bears the burden of corporate taxes. Do shareholders pay? Consumers? Or do workers pay in the form of smaller paychecks? This is known as the “economic incidence” of the tax. And when trying to figure out whether Americans’ wages might rise from the recent tax bill, this question matters a lot. According to the best estimates from the U.S. Treasury, about 20 percent of corporate taxes probably fall on workers in the form of lower pay. The remaining 80 percent is paid by shareholders (see studies here and here for an alternative view). Why does the corporate tax affect wages? Pay is closely tied to productivity. And productivity is driven by business investment. If corporate taxes discourage investment, they can depress wages -- something that’s hard to observe over days or months, but which can have a big impact on America’s standard of living over years and decades. The tax bill includes several dramatic corporate tax cuts. It slashes the top corporate rate from 35 percent to 21 percent. It repeals the corporate “alternative minimum tax.” It allows full, immediate expensing of new business investment. And it radically changes the way multinational U.S. companies are taxed by moving the U.S. away from a “worldwide” system of taxation to a “territorial” system -- a truly monumental tax change. All of these corporate tax cuts are permanent, as well. For these reasons, it’s possible in theory that lower corporate taxes can raise wages for American workers above what they’d otherwise be. After all, if workers bear around 20 percent of the corporate tax burden, they’re likely to enjoy around 20 percent of the benefits of a corporate tax reduction as well. However, that’s a very long-term impact. It’s not likely to show up in paychecks overnight, and there’s little real-world evidence that corporate tax cuts in practice raise wages in the near term. The bottom line? Don’t expect to see much impact on either jobs or wages anytime soon from the tax bill. However, economic theory gives us good reasons to think both jobs and pay might enjoy a bump over the course of the next decade thanks to big changes in the corporate tax code. How much of a bump? That’s an important and hard-to-answer question -- one economists will surely be studying for years to come. To speak with Dr. Andrew Chamberlain about this month’s jobs report or labor market trends, contact pr [at] glassdoor [dot] com. For the latest economics and labor market updates, subscribe to email alerts here and follow @adchamberlain.

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Andrew Chamberlain

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Blog Home ResearchFriday’s Jobs Report: Will the Tax Bill Create Jobs?

Friday’s Jobs Report: Will the Tax Bill Create Jobs?

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