Wages in the United States have remained largely stagnant since the 1970s, growing on average just a fraction of a percent per year.[1] However, if recent headlines are to be trusted, that trend may be changing thanks to the recently passed tax reform bill. Since President Trump signed the tax bill this past December, more than 200 companies have directly cited the new policy as enabling them to pledge wage increases or bonuses.[2] But is the new tax policy really the driving factor behind this increase in worker compensation?
The Tax Cuts and Jobs Act of 2017 ushered in significant changes to the Internal Revenue Code. One of the features having the greatest impact on corporate policy is the change to the corporate tax rate. The new bill lowers the corporate tax rate from 35 percent to 21 percent.[3] The savings that result from this decrease is what many companies, including AT&T, Comcast, and Wells Fargo, are claiming as the driving force behind their employee wage increases or one-time bonuses.[4]
The financial logic of these claims seems to make sense: a decrease in corporate taxes means an increase in corporate profits, leaving companies with more money to pay workers. However, companies crediting their wage increases to the new tax reform seem to be misleading both their own employees and the public. One striking explanation for wage increase initiatives seems to have been left out of these announcements: wages were going to rise anyway. Already this year, policies adopted in 18 states and 20 individual cities mandate minimum wage increases to well above the federal level.[5] This brings the total number of states with higher minimum wage levels to 29, a likely tipping point that has led to workers in other states seeing higher wages due to the efficiency of having uniform wage standards within a company.[6]
Another socioeconomic factor contributing to the recent trend in wage increases is the low unemployment rate. One of the basic principles of economics, known as the Phillips Curve, describes an inverse relationship between unemployment and wages.[7] When unemployment is low, and the labor market tightens, companies increase wages as a means to attract workers.[8]
Another reason these claims by corporations are misleading is because it implies that a dearth of corporate profits is responsible for the previous wage stagnation. However, at the time the tax plan was being developed “[t]he effective corporate tax rate – what companies actually pay – [was]the lowest it’s been since the 1950s, and corporate profits [were]among the highest in recorded history.”[9] Despite these record high corporate profits, few companies announced major initiatives to increase employee compensation.[10] This has led some economists, such as Harvard’s Mihir Desai, to question whether these wage and bonus announcements are simply “an example of savvy public relations.”[11] Joe Rosenberg, a senior research associate at the Urban-Brookings Tax Policy Center, noted that “some of the companies that have announced [bonuses and wage increases]were very active in lobbying for the bill,” including big names such as AT&T, Macy’s, Wal-Mart, and Verizon.[12] Rosenberg further postulates that, given factors like economic expansion and a tightening labor market, “[c]ompanies may want to attribute it to the tax change, but they might have had to increased [sic]wages even in the absence of a big tax change.”[13]
Finally, perhaps the most misleading aspect of these wage and bonus announcements is the exaggeration of the benefits workers will receive as a result of the new tax policy. According to a survey of Morgan Stanley analysts, “only 13% of companies’ tax cut savings will go to pay raises, bonuses and employee benefits,” compared to the estimated 43% that will go to stockholders in the form of dividends and buybacks.[14] Wal-Mart exemplifies this disparity. In response to the tax bill, Wal-Mart announced that it will increase its starting wage to $11 an hour and offer one-time bonuses to select employees.[15] The corporation estimates the bonuses will cost $400 million as a one-time cost, while the wage policy will cost $300 million annually.[16] The $700 million cost for this year amounts to about 0.08 percent of Wal-Mart’s annual revenue. The annual cost of the wage increases amounts to only 15 percent of Wal-Mart’s estimated $2 billion annual tax savings.[17] Almost simultaneously, Wal-Mart also announced that it will be closing 63 Sam’s Club locations, a move which impacted thousands of workers.[18] A full time job at Wal-Mart’s new minimum wage amounts to approximately $19,000 annually, below the national poverty rate for a family of three.[19]
The White House has touted, based on these companies’ announcements, that 3.5 million American workers will benefit from bonuses and wage increases, which ultimately is only a fraction of the 125.5 million Americans who work for companies.[20] And while, for many of those workers, a $1000 bonus or a $1 per week raise is certainly a welcome change, it likely doesn’t represent a meaningful improvement in their compensation. Despite companies’ apparent efforts to frame their wage increases and bonuses as evidence of the trickle-down effects of a corporate tax cut, the question remains as to whether it will result in meaningful, sustained wage growth.
[1] Jay Shambaugh and Ryan Nunn, Why Wages Aren’t Growing in America, Harv. Bus. Rev. (Oct. 24, 2017), https://hbr.org/2017/10/why-wages-arent-growing-in-america.
[2] Jim Tankersley, Bonuses Aside, Tax Law’s Trickle-Down Impact Not Yet Clear, N.Y. Times, (Jan. 22, 2018), https://www.nytimes.com/2018/01/22/us/politics/bonuses-tax-laws-trump-impact.html.
[3] Id.
[4] Khorri Atkinson, Companies Unveil Wage Hike Plans After Tax Bill Passage, Axios (Dec. 20, 2017), https://www.axios.com/companies-unveil-wage-hike-plans-after-tax-bill-passage-1515110747-305d871c-158c-4f1c-99e0-0b436cad828c.html.
[5] Grace Donnelly, The Minimum Wage Will Increase on January 1 for 18 States and 20 Cities, Fortune (Dec. 20, 2017), http://fortune.com/2017/12/20/minimum-wage-increases-jan-2018/.
[6] Id.
[7] See Investopedia, https://www.investopedia.com/terms/p/phillipscurve.asp (last visited Feb. 16, 2018).
[8] Id.
[9] David Dodson, Commentary: Why Corporate Tax Cuts Won’t Raise Wages, Fortune (Nov. 9, 2017), http://fortune.com/2017/11/09/gop-house-tax-reform-plan-2017/.
[10] Id.
[11] Tankersley, supra note 2.
[12] Jana Kasperkevic, Companies Might Have Raised Wages Even If Tax Reform Never Passed, Mᴀʀᴋᴇᴛᴘʟᴀᴄᴇ (Jan. 11, 2018), https://www.marketplace.org/2018/01/11/business/tax-bill-2017/trump-corporate-tax-cut-employees-benefit-raise-bonus.
[13] Id.
[14] David Goldman and Jeanne Sahadi, Only 13% of Business’ Tax Cuts Are Going to Workers, Survey Says, CNN Money (Feb. 9, 2018), http://money.cnn.com/2018/02/09/news/companies/tax-cut-bonuses-buybacks/index.html.
[15] Abha Bhattarai and Todd C. Frankel, Walmart Said Its Giving Its Employees a Raise. And Then It Closed 63 Stores, Wash. Post, (Jan. 11, 2018), https://www.washingtonpost.com/news/business/wp/2018/01/11/walmart-to-raise-starting-hourly-wage-to-11-offer-paid-parental-leave/?utm_term=.16a82462a080.
[16] Id.
[17] Id.
[18] Id.
[19] Id.
[20] See Goldman and Sahadi, supra note 12
