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Do tax cuts for the wealthy create new jobs?
The Right equates tax cuts with job creation as a mathematical certainty.  
Conversely, they warn that raising taxes on the wealthy will cost jobs.

In fact, the exact opposite is true, and well illustrated in recent history.
Raising tax rates on the wealthy creates new jobs.
Why?  When rates are raised, the value of a tax deduction is increased in real terms.
Faced with new, higher tax rates, the wealthy and businesses small and large, look to reduce taxable income.  Hiring a new employee or buying a new piece of equipment is
a new business expense, which directly offsets paying the higher taxes.

When rates are low, there may be little tax incentive to hire, or replace older equipment, because taxes are not perceived as a burden.  When rates are high, those same expenditures provide a bigger economic benefit through tax savings, thereby creating an additional incentive to spend.  Therefore, increasing tax rates provides an incentive for expansion, in order to shelter profits from taxes.  Higher rates provide an added benefit for risk-taking.

The theory that lower rates provides the wealthy more disposable income to invest in the economy, relies on “pushing on a string” optimism.  This is trickle down thinking that has proved valid only in urban myth and politispeak.  

When I graduated high school in 1963, the maximum individual tax rate for married couples was 91%.  This was during the Kennedy/Johnson administration.
When I graduated college in 1969 the maximum rates had declined modestly to 70%.
This was the beginning of the Nixon Administration.  These rates remained relatively unchanged for the following 12 years through 1981, including the Ford and Carter administrations.  The Regan years followed, lowering individual tax rates throughout
his eight years in office.      

Looking at the issue historically, how did the extremely high rates of the 1960’s – 1981
effect job growth?  

In the eight years of the Kennedy/Johnson era, national job growth averaged 3.25% annually.  In the eight years of the Nixon/Ford era, job growth averaged 2% annually.
The four Carter years again provided 3.2% annual job growth, all the while with the maximum tax rate steady maintained at 70%.
Then came the significantly reduced tax rates of the eight year Regan administration;
job growth averaged 2.1%, certainly not reflecting any job growth stimulus from rolling
back tax rates on the most wealthy.          

Two Bush presidencies sandwiched the Clinton administration. The Bush administrations
further reduced tax rates on the wealthy from the low tax Reagan years.
The combined 12 years of the two Bush presidencies, showed the lowest job growth in modern times.  Annual rates of job creation averaged less than ¼ of 1%, while the highest personal tax rates were dropped to 35%.  Even allowing for intervening presidencies saddled with the occasional economic recession, the low tax Bush presidencies take the record for the lowest national employment growth since the Great Depression combined with the lowest tax rates on the wealthy since 1931.  (From 1936 to 1963 the maximum personal tax rates ranged from a low of 79% to a high of 94%.  From 1964 to 1981 the rate was never below 70%. )

In between the two Bushes, the Clinton administration significantly raised tax rates on the most wealthy.  The eight Clinton years showed average job growth rebounding to 2.45%, a dramatic graphical departure from the lower tax rate policies of Bush administrations before and after.  

How did the economy thrive during periods of seemingly confiscatory tax rates?
It seems likely that the wealthy largely avoided actually paying those maximum rates whenever possible.  Individuals and small businesses scrambled to avoid paying high
tax rates by seeking to reduce taxable income.    

It has been argued, with some political success, that high tax rates promote tax evasion.  At the margin this is doubtless true to an extent.  But the wealthy, need not risk jail time, and they dread the draining legal costs.  They would much rather engage in “avoiding” tax through the artistry of tax planning.  The wealthy can afford tax planning, as opposed to tax evasion.  The most obvious planning includes increasing tax deductions and business expenses to reduce taxable income.  Hiring additional employees, buying new equipment, expanding, causes reduced tax liabilities.  

When rates are low, the wealthy seek to maximize income.  It is good tax planning to report (i.e., bunch) high income into low tax rate years.  Expansion years are not normally high income years.  It takes time for investment in plant, equipment, new employee hiring and training to pay off in higher earnings.  Therefore, low tax rates invite complacent, non-risk taking behaviour.  Raising rates provides the incentive to take action to shield income from the new higher rates.  

The formula for the relationship of employment to tax rates can be simply stated:
Tax rate cuts provide a reward for doing nothing.
Tax rate increases provide incentive for hiring and expansion.

The historical record clearly does not support the claim from The Right that, “lowering taxes on the wealthy, creates job growth”.   The truth of the matter is that the exact
opposite is the result when considering this strictly defined question.  The data provides a clear and consistent record, leaving no justification for relying on any element of the claims from the political Right.  

A different question entirely involves “targeted” tax cuts which provide tax benefits for specific actions – hiring new employees, buying equipment, funding research, etc.  But that's not what Republicans are after.  They push for lowering the rates that effect the most wealthy. That result is just more money in their pockets.    
-Richsqrd

Jobs data:  US Dept. of Labor, Bureau of Labor Statistics Archives- seasonally adjusted non-farm labor employment statistics from the "Current Employment Statistics National Survey".  http://data.bls.gov/...

Tax rate data: http://www.taxfoundation.org/...

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Comment Preferences

  •  businesses are in the business (1+ / 0-)
    Recommended by:
    VClib

    of making profits.

    When rates are raised, the value of a tax deduction is increased in real terms. Faced with new, higher tax rates, the wealthy and businesses small and large, look to reduce taxable income.  Hiring a new employee or buying a new piece of equipment is a new business expense, which directly offsets paying the higher taxes.

    So faced with higher tax rates, companies will seek to be less profitable and this is a good thing?

    I'm going to need an example with some numbers to be able to track this idea.

  •  When (0+ / 0-)

    you say, 'The wealthy', keep in mind that Obama and Bill Clinton are wealthy, then consider it's about individuals, not parties.

    If I were someone with more money than I could spend in my lifetime (yes, they exist), no, raising my taxes would make no discernible difference, nor would it create any jobs if I were not inclined to employ anyone, since I'm more than likely living on interest (from accounts) in my daily life myself.

    If I were a person who wanted to create jobs, I could do it from any position in life. I can have employees at a lemonade stand.  If my parents force me to come indoors at a certain time every night, and it affects my sales, I can't employ the kid who just moved in next door.

    This poor=good, rich=bad thinking is going to keep the economy stalled forever.

    Peace Shopper- Saving more than pennies :-)

    by Maori on Thu Jun 16, 2011 at 05:22:12 PM PDT

  •  Of course they do---that's why we have a (0+ / 0-)

    national debt of only 1 trillion and are runnng a 3% unemployment rate.

    Bush said tax cuts would fix the country, and we can see the results.   More tax cuts would obviously do more of the same.

    “Nothing in the world is more dangerous than a sincere ignorance and conscientious stupidity.” Martin Luther King, Jr.

    by maybeeso in michigan on Thu Jun 16, 2011 at 05:27:12 PM PDT

  •  Richsqrd - this is nonsense (0+ / 0-)

    The idea that higher taxes encourage hiring and more business investment is complete nonsense. There are analytical programs that help companies decide which projects should be awarded scarce capital. Taxes are one of the variables in those models. The higher the tax rates the lower the scores. So in those cities, counties, states and countries that have higher tax rates the scores are lowered by the high taxes. That is not to say that tax rates drive business decisions, but they are an important variable and the higher they are the less business people will invest.

    The real fact is that we don't know if lowering tax rates creates jobs. What your data shows is some corellation, but you can never prove causation. Tax rates are one of many variables that determine economic growth and we can never hold enough variables constant to be certain that any particular variable, including tax rates, is responsible for economic growth or job creation.

    "let's talk about that"

    by VClib on Thu Jun 16, 2011 at 05:27:25 PM PDT

    •  Nonsense. (0+ / 0-)

      When a company makes a profit, there are a multitude of possibilities, but they filter down into a few possibilities.

      1) Reap the profit.  The corporation then pays taxes on it, and:
        a) Pay it out in dividends to shareholders; or
        b) Put it in the bank; or
        c) Invest in other companies or processes or ...
      2) Avoid recognizing the profit.  Invest in the company:
        a) Pay bonuses; or
        b) Hire additional employees or talent; or
        c) Buy stuff to improve the company's position.

      Taxing profits highly moves the bias strongly towards the options in (2).

      Similarly, raising taxes on individuals helps.  Not that the individuals paying the tax will shift their consumption around (tho' there is some effect there), but the tax revenues that go to the government get spent, stimulating the economy (with stimulus multipliers ranging from about 1 to over 2, depending on how the moneys are spent), where profits going to already-wealthy individuals usually see spend/re-invest rates of 40%, with correspondingly low stimulus multipliers.  

      •  eyesoars - here is what you are missing (0+ / 0-)

        For private companies, often structured as LLCs or Subchapter S corporations, where profits are often taxed to the indivdual owners your points may have some merit. However, to any public company, small, medium and large you are missing one key element - earnings per share. The companies want to show long term growth in both EPS and EBITDA (earnings before interest, taxes, depreciation, and amortization) because that will impact the value of the company in the public market. It's the share price that shareholders most value and even if a company is paying taxes, growing earnings impact shareholder value. Many of the items you list are expenses which reduce pretax income and lower both earnings per share and EBITDA and would not be viewed favorably by shareholders. One other impact of high tax rates is that it favors leveraged buyouts.  Cash flow that is being paid to taxes can be eliminated by interest payments on new debt.

        "let's talk about that"

        by VClib on Thu Jun 16, 2011 at 09:19:32 PM PDT

        [ Parent ]

        •  Didn't miss it... (0+ / 0-)

          It handicaps all companies equally in the eyes of investors, and so 'comes out in the wash'.  It may influence companies somewhat, but still doesn't affect their range of choices.

          Higher taxes also bias companies towards long-term value rather than short term.  Also a good thing.

  •  No. (3+ / 0-)
    Recommended by:
    cfm, Prospect Park, Alumbrados

    This has been brought to you by simple answers to stupid questions.

  •  a simple example of the effect (0+ / 0-)

    of tax rates on growth.

    I need 200K to invest  and start a business. I estimate that investment would yield a pre-tax profit of 30k per year the first few years.

    If profits are taxes at 10%, then i keep 27K for myself. If the rate is 40% then i only keep 18K for myself.

    Some people who would go for it for 27K and start the business would think again if the take rates were changed to cost them the extra 9K.

    If the ROI looks too low, people will simply choose to do safer things with their money.

    There will always be people on the edge where lower taxes will make the go/nogo decision a go.

    •  Yea, they invest in T-Bonds at 3% (0+ / 0-)

      swift move.  Higher returns mean higher risks and you're not making investment decisions in a vacuum.  Even the T-Bond has risk.  If interest rates go up then you're stuck holding that bond for 30 years.

      Your scenario paints a very simple anecdote to address a very complex situation and you're wrong.

      Sorry but life is not that simple.

      I am here to represent the democratic wing of the Democratic Party. Roar louder!

      by Josiah Bartlett on Thu Jun 16, 2011 at 06:07:40 PM PDT

      [ Parent ]

  •  Cutting taxes for people who already have (2+ / 0-)
    Recommended by:
    Josiah Bartlett, eyesoars

    more money than they need is not likely to create jobs.

    College students, great cooks, unemployed engineers, designers, inventors, and the like with new and innovative ideas create jobs.  Rich, fat cats don't have the hunger or incentive to create jobs.

    "I've learned that people will forget what you said, people will forget what you did, but people will never forget how you made them feel." Maya Angelou

    by ahumbleopinion on Thu Jun 16, 2011 at 05:42:23 PM PDT

  •  It's Much More Income Compression, Not Tax (3+ / 0-)

    evasion, that is the value of steep progressive taxation.

    Businesses weren't offering the 9 or so million dollar incomes necessary to deliver 1 million or so takehome for the highest brackets. A great chunk of the upper economy was being compensated less, which first makes a rich menu of enterprises interesting to investors who no longer have a few jackpot sectors like finance and import, and second makes that same rich menu of enterprises including public service and charity work attractive to upper end talent, since they too no longer have jackpot income potential in any sector.

    With jackpots being pointless, business wasn't pursuing them, instead managing for the medium and long term growth and health of enterprises. And so we had the sole 50 year period without panics and depressions in our entire history.

    And as a result the wealth of society grew at all levels except the very poor, and the middle class became wealthier compared to the rich as the wealth concentration of the Gilded Age lowed out into our most democratic economy ever.

    Tax avoidance certainly happens but it's a trivial issue compared to stabilizing and democratizing the economy, which is almost the entire purpose of progressive taxation.

    We are called to speak for the weak, for the voiceless, for victims of our nation and for those it calls enemy.... --ML King "Beyond Vietnam"

    by Gooserock on Thu Jun 16, 2011 at 05:52:37 PM PDT

  •  Great information! (1+ / 0-)
    Recommended by:
    Josiah Bartlett

    Thanks for compiling all this info.  I had no idea that job growth during the Reagan admin was so low.  

  •  If Tax Cuts=Jobs Were True (2+ / 0-)
    Recommended by:
    eyesoars, Corwin Weber

    We'd be swimming in jobs. We'd be at full employment and our greatest worry would be what to wear to work tomorrow.

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