Question

When the professional economists in the Trump administration calculated the benefits to household incomes based on increased wages associated with the reduction in the corporate income tax rate proposed by the administration, they were ridiculed because the total benefits to household incomes exceeded the amount of the tax cuts. Was this justified? Illustrate your reasoning graphically. Hint: The corporate income tax is a tax on corporate profits and can be seen as a tax on the return on capital. This is known as the rental rate of capital and is the compensation the owners of capital used in the production process obtain

Answer 1

The overall benefits exceeded the expectation broadly due to higher wages which were consequence of corporate income tax cuts coupled with cuts in personal income taxes which had cascading effect of higher disposable incomes and thus rise in consumption and spending. This led to higher overall GDP per capita due to rise in household incomes.

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