Wage Increases and Tax Cuts

Recently the Dow Jones index faced a drastic fall. This fall was partly because of the fears of inflation that were sparked by increasing employee wages. This is because employee wages have been stagnant in America for close to a decade now. The drastic short-term rise was attributed by many to be the result of the steep tax cut that Donald Trump’s government had introduced in America. There were many debates as to whether tax cuts were the underlying reason and if so how significant were these wage increases.

In this article tries to explain the relationship between wage increments and tax cuts in America.

The Argument against Tax Cuts

Many people in American politics believe that Donald Trump’s decision to cut wages was not the best for the people of United States. Many of them believe that Donald Trump has instructed his cronies to increase wages for a short while. These increments can then be attributed to public relations campaigns and not to the underlying changes in the economy.

According to these critics, these wage increments will soon be rolled back after creating the positive image that they were meant to create. They believe that the corporations are the real beneficiaries of this tax cut. They were allowed to move in trillions of dollars back into the United States without paying much tax. On the other hand, the hard working American population is being penalized.

The argument cited by the critics is that tax cuts may result in wage increments. However, all this does not happen so instantaneously. Tax cuts take some period to get translated into increased profits. These increased profits then chase productive workers to obtain their labor. As a result, wages do increase after tax cuts. However, that takes over a year. Critics believe that wage increments which occurred less than a month after the tax cuts were definitely not genuine.

The Argument for Tax Cuts

There are many proponents of Donald Trump’s tax plan. They believe that a historic move has been made by lowering the tax rate on corporations. They also believe that this will lead to increase in worker’s wages. Firstly, they rubbish the argument that these wage increases are temporary and will be rolled back soon. They cite the fact that wages are downward sticky. This means that wages are easy to increase. However, they are almost impossible to decrease in the short run.

Also, their arguments rest on the fact that companies do not give wage increments from the money they save via tax cuts. Instead, companies give wage increments on the expectation of the money that they will save via tax cuts. Like all other markets, the labor market also works based on the expectation of future events.

Also, they believe that there is a straightforward business case for giving wage increments. When a product is sold, the proceeds should ideally be divided amongst land, labor, capital, and enterprise. However, in the modern world, the proceeds are divided amongst land, labor, capital, enterprise and also the government. The government forcefully takes a share. This ends up making everybody else’s share smaller. Hence, if the government were to relinquish a part of its share, everybody else would get an increment. It is true that some capitalists may want to keep the increment to themselves and not pass it down to the workers. However, such capitalists will face increasing competition from others who are in need of productive workers. Eventually, someone from the market will hire the workers at the increased wage level. Hence, any decrease in the tax rate will always see a corresponding increase in the remuneration of all the other factors of production.

Also, Trump’s supporters agree that corporations have benefitted disproportionately. However, they believe that this should be the case always. Corporations are the ones that generate employment and income for everyone. The problem solvers are more important than the people seeking solutions. Hence they should be kept happier!

Tax Cuts and Spending Cuts

Donald Trump may have made the right decision by cutting taxes. However, this decision is only half the story. Tax cuts without spending cuts do not mean much. This is because the government has cut the source of revenue. However, if it still goes spending money, then there will be a budget deficit. This shortfall will have to be funded by printing money. The act of printing money will lead to an increase in currency all throughout the economy. As a result, inflation rates will start rising. Hence, even though the nominal wages of people will increase, the inflation rate will also rise. Hence the real wages will remain unchanged or they may even reduce.

At the current moment, America is planning to pay off the revenue shortfall by increasing debt. This may not lead to inflation in the short term. However, this will cause the economic growth to suffer. Sooner or later, the debts will become due to the government will have to run the printing press to pay them off. The bottom line is that the government should spend within its means. If they are reducing their income, they should also make provisions to reduce their expenses proportionately.

To sum it up, tax cuts are definitely a step in the right direction. They have led to an increase in worker wages. However, if expense cuts do not follow suit, inflation will quickly eat into these wage increments, and the workers will be left worse off.

❮   Previous  Article Next  Article   ❯

Similar Articles Under - Globalization

View All Articles


Authorship/Referencing - About the Author(s)

The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.


Globalization