Impact of Corporate Tax Cuts on Wages and Investment
- September 4, 2024
- Posted by: OptimizeIAS Team
- Category: DPN Topics
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Impact of Corporate Tax Cuts on Wages and Investment
Sub: Eco
Sec: Fiscal Economy
- Introduction to Corporate Tax Cuts:
- Corporate tax cuts were implemented by major economies, including the U.S. and India, prior to the pandemic.
- The goal was to stimulate economic growth, increase investment, and boost employment and wages.
- Corporate Tax Cuts in the U.S.:
- The Tax Cuts and Jobs Act was signed into law by President Trump in December 2017.
- Significant provision: Reduction of the top tax rate on corporate income from 35% to 21%.
- Expected Outcomes:
- Increased corporate investment, leading to higher growth and employment.
- Upgradation in technology and productivity, resulting in higher wages.
- Actual Outcomes:
- Investment increased by 8% to 14%, preventing a potential decline without the tax cuts.
- Long-term increase in GDP was only 0.9%.
- Wage increase was less than $1,000 per worker, contrary to the expected $4,000 to $9,000.
- Long-run reduction in tax revenue of approximately 41%.
- Corporate Tax Cuts in India:
- In September 2019, India reduced corporate tax rates:
- Existing companies: Tax rate reduced from 30% to 22%.
- New companies: Tax rate reduced from 25% to 15%.
- Impact on Revenue: A tax revenue loss of approximately ₹1 lakh crore in 2020-21.
- Employment Impact:
- Despite some recovery, the corporate sector’s contribution to employment has been minimal.
- Increase in employment primarily in insecure work and unpaid family work in rural areas.
- Wages Impact:
- Rural regular wage workers saw a CAGR of 4.53%; urban regular wage workers had 5.75%, barely above inflation.
- Real wages for rural areas declined, while urban wages stagnated.
- Corporate Tax Collections:
- Despite healthy growth post-pandemic, there was minimal impact on employment and wages.
- Notable layoffs in the tech industry despite tax cuts.
- Shift in Tax Burden:
- Corporate tax cuts have resulted in a shift of the tax burden from corporates to individuals.
- Corporate taxes as a share of gross tax revenues decreased from 32% in 2017-18 to 26.5% in 2024-25 (budget estimate).
- Income taxes increased to 30.91%, and GST rose to 27.65%.
- Conclusion and Policy Implications:
- Tax cuts have had only marginal effects on private investment.
- Immediate benefits were seen by private capital, while wage-earners saw little to no improvement.
- Suggested Strategy: High taxes on existing profits with increased incentives for future investment.
- The experience underscores the complexity of policy making in an uncertain economic environment.