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
One thing you left out, an increase in income due to less taxes means consumers by more. If they are buying more, you need more workers to sell products, so you have to hire people to meet the new demand.
I have a small business and tax policy has virtually no affect on how I run it. Whether or not I hire an employee is solely a function of the demand for my company’s services. If demand increases, I will hire so that I can increase production and generate more revenue.
If my taxes are cut and there is no extra demand, I wouldn’t even consider hiring additional employees. When I hear politicians say that tax cuts for biz = new jobs, I wonder if they are basing that on actual experience or if they are just mindlessly repeating some talking points.
A very well thought out and succinct argument with sound reasoning.
It’s important to analyze the assumption put forth above – that less taxes means consumers will spend more. That effect would, at most, also be very limited – some jobs would be created, but not to the extent that supporters of tax cuts might claim:
1) There’s the time factor. Even if consumer demand directly and significantly increased as a result of having more spending money (which is not guaranteed to begin with), it would still take time for the market to respond to that demand. Hiring people doesn’t happen over night – you have to advertise and look for prospectives, interview them, check their credentials, train them, and incorporate them into your work force. That’s a lot of time and work that may not necessarily be equal in value to the amount of additional money businesses would have as a result of tax cuts. And even then, as it’s already been said, if there is no extra demand, tax cuts don’t mean that more workers will be hired. It depends on the conditions of the market.
2) Did we forget that a substantial portion of consumer products are made overseas now? So having more spending cash to buy products doesn’t necessarily mean that the money will be used to hire more American workers.
3) When taxes do get cut, it’s not important what the AVERAGE amount of money goes back to the tax payer, but the RANGE of amounts, as well as the MODE – i.e., what amounts were most frequently saved by people in the population because of tax cuts. True, if you make more money, you get taxed more, and so with tax cuts, you would get more money back. Well, exactly how much on average for people in the upper income brackets? And has anyone ever surveyed people in these tax brackets and asked what they may tend to do with the money they save from tax cuts? I agree that just having extra money doesn’t mean that it will be spent or reinvested – it depends on the market conditions – that’s managing your money smartly.
Also, again in terms of the range of money saved from tax cuts, what about for people in the middle and lower class? Taxes get cut, so depending on how much money they are saving, how likely are they to spend it if times are hard? If most tax payers are only getting an extra $300 or $600 from tax cuts, and the economy isn’t doing too well, then I would think the wisest thing to do would be to save that money – in these hard times, I would.
And this is why the MIDDLE and LOWER classes need tax cuts like there is no tomorrow — and why BIG BUSINESS needs to get sacked with HUGE tax increases.
We need to start actively DISCOURAGING major corporations from moving their operations to other countries. We could do this by slapping them with HUGE penalities for, say, moving their factories to China, while offering major concessions if they hire people here at home.
We need to start FORCING them to play by OUR rules. We have been far to kind to the CEOs and major stockholders here in the United States. If you are such a person and are reading this message, you had better get ready — because we are coming for your WEALTH.
Wealth is BAD. Wealth is EVIL. GREED IS WRONG, and should be actively PUNISHED.
[...] an excellent take on “tax cuts creating [...]
Tax cuts for the wealthiest does not mean additional consumption. They already have sufficient income to consume as they see fit. And I’d generalize further by saying that they did not become that wealthy by going out and buying for buying’s sake. You want to increase demand and increase consumption by the vast majority of folks you target your incentives toward them, including an extension of unemployment insurance benefits. Then, as a writer stated above, change the tax code in order to have companies keep their manufacturing ops here in US. Do something about NAFTA, etc., and create import duties in order to protect American companies and their employees.