Do Tax Cuts Really Create Jobs? March 5, 2009 at 11:07 am
Context: I feel the need to examine the claim that tax cuts will stimulate job creation and/or prevent job losses in the US. There is a heated partisan debate in Washington about how to stimulate the economy and prevent a severe depression. Conservatives have been very critical of the liberal solution: massive government spending and tax increases on the wealthy. The Republican solution: reduce spending and cut taxes, especially the taxes of wealthy business owners and investors who (presumably) create jobs/wealth.
Disclaimer: I’m speaking in general terms here without getting too bogged down in details. I’m not a business expert or economist. Just a regular person willing to put in the effort to understand. I did take an undergraduate course in the philosophy of economics, so it may get a little geeky here.
My Premises: (1) The clear purpose of business is to profit. (2) The government has an active role in both encouraging economic growth/productivity and keeping unemployment low. (3) Government must balance the interests of business and labor, producers and consumers.
My Perspective: The statement that tax cuts create jobs is misleading.
First, I accept that some strategic tax cuts will stimulate economic growth. The rationale is simple enough; the more income that businesses get to keep, the more money they will have to expand and employ more Americans. Cut taxes and there will be more (taxable) money circulating in the economy. Eventually you will see greater tax revenue from booming business and the workers they employ. If a business owner or corporation is required to pay higher taxes, then that could lead to layoffs, salary cuts, or consumer price increases – all of which hurt the middle and lower class. Looks a lot like big government getting in the way of prosperity.
Keep in mind that this argument loses effectiveness if the tax rate is already relatively low or the rate increase is relatively small, e.g., an increase from 5% tax rate to 10% does not carry the same effect as an increase from 25% to 50%.
Here’s where it get’s sketchy: Just because a company can create more jobs doesn’t mean it will or even should. The purpose of business is to earn profit (premise 1) not to create jobs. From the business perspective, job creation is a means to an end and not an end in itself.
So let’s say we give a generous tax cut to the top earners, mostly business owners and investors. That additional money can be used (or not used) on any number of things. In this poor economic climate, many businesses will just be using those tax savings to pad their balance sheets or acquire other companies. CEOs are under enormous pressure to make their companies profitable and that often involves cutting jobs and increasing worker productivity. Since our country faces an uncertain future, I understand the business decision to simply pocket the extra money and continue streamlining operations. Likewise, business investors will not be rushing to put their money back into the market just because they now have more money from their tax cuts; only when the market conditions are favorable will trading and investing pick up. No sensible investor would pass up a good money maker just because they’re being taxed.
Rich people are rich for a reason. They make consistent decisions according to a clear objective: make money. Businesses don’t need a tax break as incentive to grow and expand. Growth and profit are in the DNA of every strong company. But they will do it on their own terms unless forced to do otherwise or offered a deal they can’t refuse (tax breaks with conditions).
From the government perspective, (assuming that government does in fact represent the will of the people) job creation is an end in itself. Meaning that Americans believe that this is the Land of Opportunity and jobs should be available for those willing to learn skills and work their asses off. If we expect the government to represent both business interests and worker interests, then it needs to assert itself in some direct way to stimulate job creation. Tax cuts alone will not persuade a company to hire more workers. Only the bottom line will convince them. Employing American workers is expensive.
Tax cuts may help boost the overall wealth in this country, but is it worth it if all the additional wealth goes to those who need it least? Would it still be worth it if the rest of Americans were worse off for it?
The Bush-era (2000-2008) of deregulation and upper class tax cuts appears to be a Kaldor-Hicks move: the overall US economy (GDP) grew, the number of jobs increased but at a slower rate, and the wealthiest 1% of Americans were the ones who were rewarded. The middle and lower class are actually worse off on average now, with (inflation-adjusted) salaries staying about the same while the cost of living rose.
The claim that tax cuts for the wealthy will stimulate job creation is badly oversimplified. Will some jobs be created as a result? I’m sure of it. But I believe the real impact of tax cuts is widely misunderstood and exaggerated in both directions.
Sources:
New Data Show Extraordinary Jump in Income Concentration in 2004, Revised 10/13/06
HISTORICAL EMPLOYMENT: B-1. Employees on nonfarm payrolls by major industry sector, 1959 to date
Wikipedia: Household income in the United States
U.S. Department of Commerce, Bureau of Economic Analysis: Table 1.1.6. Real Gross Domestic Product, Chained Dollars and Table 1.7.5. Relation of Gross Domestic Product, Gross National Product, Net National Product, National Income, and Personal Income
In Conservative America, two poor kids in a small rural town were awarded football scholarships and left home for college. Meanwhile, the rest of the folks competed for the handful of local jobs that provided decent pay. Twenty years later, both men returned to their hometown.
