×

Here's the biggest missing piece in GOP tax plan

  • The GOP tax plan offers a handful of middle-class tax cuts, aims to slash the corporate tax rate, lower taxes on business owners and investors, and confer steep benefits to corporations that take on investment.
  • Working Americans, however, may be feeling left out of the deal.
  • Here's why a payroll tax would be better for the economy than a corporate tax cut.
President Donald Trump delivers remarks on proposed changes to the U.S. tax code at the state fairgrounds in Indianapolis, Indiana, September 27, 2017.
Jonathan Ernst | Reuters
President Donald Trump delivers remarks on proposed changes to the U.S. tax code at the state fairgrounds in Indianapolis, Indiana, September 27, 2017.

Republican leaders released their tax plan this week, and it's ambitious: in addition to a handful of middle-class tax cuts, the plan aims to slash the corporate tax rate, lower taxes on business owners and investors, and confer steep benefits to corporations that take on investment. While business owners and investors probably cheered the plan, U.S. workers may be feeling left out of the deal.

We don't have an official estimate of the cost of the tax cuts for businesses, but it's undoubtedly pricey. The Urban-Brookings Tax Policy Center calculated the cost of a similar plan released by then-candidate Donald Trump during the campaign. By any measure, the cuts are massive. Trump's plan would spend roughly $2.4 trillion to lower the corporate rate; $1.5 trillion to cut tax rates on non-corporate businesses; $1.3 trillion for allowing corporations to write off their investments faster; and $150 billion to corporations that previous stashed their profits overseas. All told, we're talking several trillion in cuts for U.S. businesses.

It's reasonable to question whether such a large drop in revenue is worth it. Republicans are quick to remind taxpayers that the U.S. has the highest tax rate in the developed world, which is true but misleading: the U.S. corporate tax code is so riddled with loopholes that the average corporate tax bill is in the middle-of-the-pack compared to our competitors. Republicans are also quick to highlight that by taxing corporations on their profit earned abroad encourages companies to keep their earnings overseas. Again, true but misleading: most of those earnings are reinvested in U.S.-based securities like Treasury bonds or stock in American companies.

Cutting corporate taxes has its merits, but the real question is why haven't Republicans backed a plan that does more for American workers?

On the whole, U.S. businesses are doing just fine. Workers aren't. Wages for all but the highest earners have been mired in a four-decade long stagnation. The minimum wage has fallen by 13 percent, after accounting for inflation, since it was las raised in 2009. And despite an unemployment rate just north of 4 percent, there are still 5 million workers in part-time jobs who would like to be working more. Millions of Americans are due for a raise.

It's not clear they would get one under the Republicans' plan. Economists are in staunch disagreement over the impact of corporate tax cuts on wages. One line of thinking says that by cutting the corporate tax rate, investors will add more capital to the economy, productivity will rise, and workers will be paid more. The alternative line of thinking is that a corporate tax cut will benefit investors, but won't transfer to higher productivity or increased wages. Overall, we just don't have great evidence on who ultimately benefits from a corporate rate cut.

But we do know two surefire options for giving workers a raise through the tax code. One is to raise the earned-income tax credit, which gives a subsidy of up to 45 percent for low-wage workers. A second is to cut the payroll tax—either directly or by giving an income tax refund based on earnings. These are the most direct ways to ensure that workers keep more of their paycheck.

Consider a payroll tax cut of 2 percent. Every single American worker would get a tax cut. Most workers—those earning less than the cap of $127,200—would see a 2 percent boost in their paychecks; workers earning more would get proportionately less. Returns to work would rise, appeasing supply-siders who think too little labor is stunting growth. The cost would be roughly equivalent to the corporate tax cut espoused by GOP leaders. American workers would get the raise they've been waiting for.

Republican leaders are right that we need to change the way we tax businesses. But trillions in tax cuts, with hardly any direct cuts for workers, is a suspect parceling of benefits. My former boss—Vice President Joe Biden—often cited his father in saying: "Don't tell me what you value, show me your budget, and I'll tell you what you value." I couldn't agree more.

Commentary by Benjamin Harris, a visiting associate professor at the Kellogg School of Management at Northwestern University and was formerly the chief economist to Vice President Biden.

Follow CNBC's Opinion section on Twitter @CNBCopinion.