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.
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/...