Kevin Hassett Updates Adam Smith

The chair of the White House Council of Economic Advisors, Kevin Hassett,visited Cato last week to talk about tax reform. Under Kevin ’s leadership, the CEA has producedtwo reports discussing how corporate tax cuts can boost wages and growth.The CEAexplains the basic mechanism:reductions in the corporate tax rate incentivize corporations to pursue additional capital investments as their cost declines. Complementarities between labor and capital then imply that the demand for labor rises under capital deepening and labor becomes more productive. Standard economic theory implies that the result of more productive and more sought-after labor is an increase in the price of labor, or worker wages.Anddiscusses how lower taxes attract investment from abroad:One component of investment is foreign direct investment (FDI), and numerous empirical studies … have observed that FDI is highly responsive to cross-border differences in tax rates.Anddescribes how high corporate taxes hurt workers in the global economy:The fact that capital can move relatively easily across borders while labor cannot serves to intensify the burden of the corporate tax on workers.Essentially, the CEA studies update Adam Smith with new empirical data. Writing in hisWealth of Nations, Smith described how heavy taxes on mobile “stock,” or capital, in a world with open borders would cause losses to workers and the broader economy:Secondly, land is a subject which cannot be removed, whereas stock easily may. ...

Source: Cato-at-liberty - December 5, 2017 Category: American Health Authors: Chris Edwards Source Type: blogs