Will the New Tax Law Create Jobs and Boost Wages?

tax law

In December, President Donald Trump signed sweeping tax legislation, after the bill formerly known as the Tax Cuts and Jobs Act passed the House and the Senate along party lines.

The nearly 500-page law represents the biggest changes to the U.S. tax code in 30 years, dropping the corporate tax rate permanently to 21 percent and lowering individual tax rates, with those cuts set to expire in 2025.

The legislation also puts a cap on state and local tax deductions, repeals the individual mandate to purchase health insurance and nearly doubles the standard deduction. (The New York Times created an interactive of the final tax bill with the most significant changes for corporations and individuals.)

Proponents of the tax legislation say that it will stimulate the economy, creating jobs and inspiring companies to raise wages. Critics predict that companies will pocket the extra cash and boost dividends and share buybacks.

An Unpopular Law

In the short term, four out of five Americans will see tax cuts under the new legislation — but you wouldn’t know it from the law’s popularity, which is historically low for tax reform.

“About a third of voters currently support the Republican tax reform package, according to an average of five surveys released this month,” wrote Harry Enten at FiveThirtyEight in November. “In a Quinnipiac University survey, just 25 percent of voters approved of the plan. Surveys from ABC News/Washington Post, CNN, Morning Consult and YouGov put approval of the plan slightly higher, but all are still at 36 percent or lower. Meanwhile, an average of the five polls puts opposition at 46 percent.”

Support for the tax bill was low, Enten said, because most Americans “think it disproportionately benefits the rich.”

And, as he points out, it probably will. Even with changes like an expanded child tax credit, benefits for individuals are significantly lower than benefits for corporations. Plus, the tax breaks for individuals are temporary, while those for corporations are permanent.

How Will the Tax Law Affect American Workers?

The first question is whether the law will boost the economy as much as advertised. The Trump administration has predicted 4 percent GDP growth next year, thanks to tax reform. But the real stumbling block for economic expansion isn’t creating jobs — it’s convincing workers to return to the labor force.

The fact is that companies are already having trouble finding the skilled labor they need.

“Firms that save money from the tax cuts may simply be unable to find more workers to hire at the price they are willing to pay,” writes Danielle Paquette at The Washington Post.

Of course, they could boost wages and create training programs to upskill willing workers. So far, however, pay has grown slowly in the wake of the recession. And while the declining labor force participation rate is almost certainly multifactorial, low wages probably aren’t helping. The PayScale Index shows that real wages — the value of worker pay when inflation is taken into account — have declined 6.9 percent since 2006.

In that case, don’t count on tax cuts to boost wages and therefore hiring. Only one-third of the members of the North American CNBC Global CFO Council think that the law will lead to higher pay.

Some companies are promising pay increases. Late in December, AT&T announced that it would celebrate the new tax law by giving 200,000 employees a bonus of $1,000. However, a few days before, the company laid off 700 DirectTV workers.

Tell Us What You Think

Do you think the tax bill will create jobs and boost wages? We want to hear from you. Tell us your thoughts in the comments or come talk to us on Twitter.