In the wake of companies announcing pay hikes after the tax cut package, lots of economists are weighing in on whether the two can be related. Krugman is quite sure they have nothing to do with each other, and John Cochrane basically agrees with him (even though the tone is miles apart, the underlying analysis is very close). David R. Henderson is more open-minded (and he’s linking to Veronique de Rugy), but even s/he is very cautious.

Believe me, I understand the type of model all four of the above, professional economists have in mind when discussing this stuff. Nobody is denying that a big cut in the corporate income tax rate could affect wages *eventually*, through higher investment that leads to higher productivity that leads to higher wages because of competitive labor markets. And so they they are bouncing around the plausibility of companies raising wages pre-emptively to reduce worker turnover etc.

But are economists overthinking this?

Consider: Suppose they jack up the corporate income tax rate to 100%, and enforce it ruthlessly. I think I can come up with a pretty standard neoclassical model in which corporations don’t want to hire workers (or rent machinery for that matter), if no matter what happens, the corporation has no benefit from the operation. So in that scenario, even though the wages would be deductible, there would be no reason to hire workers and so the wages of workers would fall. Starting from such a standpoint, a cut in the corporate income tax rate from 100% down to 21% would immediately increase the demand for labor and hence the equilibrium wage rate of workers.

If you buy that, is it impossible to tell a story in which cutting the corporate income tax rate from 99.9999% to 21% immediately boosts wages? And not because of expectations of an effect in Year 8, but because of immediate considerations?

If you buy that, why are we so sure it’s impossible that cutting the corporate tax rate from 35% to 21% could have an immediate and direct impact on the demand for labor?