Do tax cuts stimulate job growth?

Cecil's Columns/Staff Reports
21

I understand what you’re saying, and once again, I’m not trying to be socialist. But I’ll raise you’re government’s burnt steaks by one AIG derivative debacle, or one BP oil spill. Your pork project is my county’s widened highway. That’s all in the details. Governments, private individuals, and corporations all spend money in ways that are obviously bad, bad in retrospect, and “wasteful” in that they are just to clean up their own mistakes. Perhaps the government spends money to fully staff the DMV so it can run efficiently and makes lots of people happy because they get good service (just an example, don’t laugh); is that a better or worse use of the money than opening a restaurant?

I totally get the desire for a small government. I certainly don’t want it any larger than it absolutely needs to be, but I don’t think the idea that government=bad really follows. The government is the largest organization in many places, so purely by base rate it’s going to do lots of things badly. Any large organization does lots of things badly (even Apple). I think one of the biggest issues with government, is that I can’t just divest myself of them (sell APPL, for example) if they’re behaving in ways I don’t like. I don’t care for Apple’s walled-garden approach to computing, but that doesn’t mean the new ipad isn’t a great piece of kit. The government in the US has certainly been doing something right, in that this is still a safe and prosperous country to live and start businesses (the degree of safety and prosperity has local variation, but compare it to lots of other places in the world…)

Getting back to Cecil’s column. I think if lowering taxes could create jobs simply and effectively every time, then the government would just lower taxes when unemployment rose above 5%, and raise it a bit as it went below.

22

You do not get a pass on supporting your claims by simply declaring conservative dogma to be “common sense”. It is either supported by the data, or it is not. In this case, it is not.

23

Depends on what you hold to be “efficient”. Is undercharging for steel (effectively subsidising it) and thus making a net loss efficient or not? Is running a bus service next to a retirement home efficient or not if it provides an essentially invaluable service for the pensioners, that would otherwise have to pay triple the price for a private taxi (hooray, competition)? Is having a system of healthcare that puts American’s lifespan on a par with Cuba for 14* the price efficient? I know, I know, the anarchocapitalists (vis their prophet Herbert Spencer) want even fewer poor people to have access to healthcare, so that’s hardly a fair comparison.

Of course, given the principle of “currency” where every act of consumption is an act of production, as every purchase stimulates growth, it’d be far better to simply redistribute wealth to the poor since they’re more liable to make purchases. That’s ignoring the fact that they’re more in need of basic amenities and that their quality of life increases should they receive those amenities, but that’d contradict a basic feature of right-wing economics: that wealth adequately tracks worth (or in abbreviated form: “property rights”). That pre-dates Capitalism too, the Capitalist conception is that prior ownership of property allows one to prosper from the sweat of another’s back. Skip the part about “perfect liberty” in Wealth of Nations.

24

Oh, for the love of Og, can we give up on this mantra already? For the last 12 years, we’ve actually done the experiment – made historically massive tax cuts, and watched unemployment skyrocket – across a lengthy period, under two different administrations, and under a variety of economic and polictical conditions.

Anybody who can still claim with a straight face that cutting taxes still further will somehow magically create jobs had bloody well better start by explaining why it’s not already working, and fact has, as most of us socialists predicted, produced exactly the opposite effect. *

Otherwise, let’s move on and admit it doesn’t work, put taxes back to the way they were at the end of the Clinton administration, and actually start getting some of those jobs back – sure, it’ll be government jobs first, but who cares? Virtually eliminating the single largest spender in the country’s ability to spend is not a recipe for improving the employment of those the government buys from.

  • I am, of course, using the new GOP/FOX definition of “socialist”, which means “anyone who’s ever approved of government spending money on any public service, ever.”
25

The problem with economic theories is that there’s no way to laboratory test them. And almost all of them have periods of history that are counter-examples. Economists pretending to be scientists, laden with graphs and statistics, is basically a joke. The reality is too complex for any theory or mathematical model; people’s behaviors is at bottom of it, and that’s not graphable.

Driving the country to bankrupcy because of an economic-theoretic model is what Reagan did. As noted, we’ve been subjected to this notion that cutting taxes for the rich will increase jobs, and it hasn’t worked. Might it work in another climate, another country, another time? Sure. But it hasn’t been working here, not for the last two decades or more. Why continue it?

26

I don’t understand how it’s speculative to say that cutting taxes creates jobs. I used to work with lots of small business owners, and to them it’s not a theoretical issue. On any new hire, expansion, or purchase, they always compare projected revenue to projected expenses. It’s called “running the numbers.” They project a profit and decide whether that profit is sufficient to justify the risk.

Taxes are part of the projected expenses for any business venture. If taxes go down then expenses go down, which means that profits go up and some number of business plans move from not worthwhile to worthwhile.

So it should be impossible to deny that cutting taxes creates jobs somewhere for somebody. Tax cuts aren’t about animal spirits. Taxes are specific line items on specific spreadsheets that wealthy people use to decide what to do with their money. I’ve seen these spreadsheets. I’ve worked with these people. For them, this is a very clear and tangible subject.

So there’s no real question that lowering taxes creates jobs. The question is how many jobs versus what loss to tax revenue. That depends somewhat on the number of created jobs versus the amount of decreased taxes, both of which are hotly contested numbers. But underneath it I think the calculations and arguments just reflect gut feelings about government and business.

My gut feeling is the government is the villain because it operates by force and business is the oppressed hero because it provides people with what they want. Some people apparently see it the other way around, and I can understand their point of view. It’s a difference of perspective that math can’t reconcile. But claiming that tax cuts have no effect on jobs doesn’t fit the facts of real-life business planning.

27

Right. But they are not the only factor, and not even the most important factor in the decision to expand or contract. Businesses do not add jobs in the absence of demand for their products. That is why we have high unemployment now; demand fell. No thoughtful business owner is going to add employees when he just got through shedding capacity when demand fell. Businesses don’t create jobs just to soak up excess capital; if that were true, American corporations wouldn’t have$1.24 trillion on the sidelines, most of it stashed overseas. In the absence of consumer demand, tax cuts are just a giveaway for stockholders.

28

Throughout the administration of Franklin Roosevelt there was a steady increase in the top tax rate and a steady decline in unemployment, except for about a year after 1937 when government spending was increased.

http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=213

Those who maintain that the record of the New Deal is irrelevant because the economy has changed are the kind of people who would have opposed the New Deal at the time.

29

There was an increase in the United States in homeless people and panhandlers because of the economic policies of the Reagan administration.

30

There was more job creation per year during the Carter administration when the top tax rate was 70 percent than during the Reagan administration when the top tax rate declined to 28 percent. The unemployment rate reached three percentage points higher under the Reagan administration.

http://blogs.wsj.com/economics/2009/01/09/bush-on-jobs-the-worst-track-record-on-record/

http://research.stlouisfed.org/fred2/data/UNRATE.txt

31

Given that this gets implemented, I could see that the positive net tax payers would be the 30+ year old workers (obviously they would all vote/allocate the funds for their own benefit). As a result, all government support programs will be targeted towards the tax paying cohort.

Any ways my point is that post secondary education would be less funded/subsidized . Resulting in a cycle that increases blue collar labour force in country that is loosing manufacturing to china.

Edit: For the sake of brevity on only quoted a part of your argument (pleae don’t take the quote out of context and read Cylar’s full stance on this issue)
Cylar- How would you mediate this problem?

32

When dealing with economic inequality we should consider gross income, and net income. Gross income is what you get before taxes. It can only be influenced indirectly by government economic policy. Net income is what you get after taxes, and in your pay check. Both kinds of income have become more unequal since 1980.

I can think of two reasons gross income has become more unequal. First, the population has grown, largely as the result of immigration. A growing population benefits capital at the expense of labor. Second, computer technology has reduced the economic value of jobs that can be learned by those of average and below average intelligence while creating opportunities for geniuses.

The obvious reason for the increase in net income inequality has been the flattening of the tax system since the election of Ronald Reagan in 1980.

The increase in gross income inequality could be a Democratic issue. Nevertheless, the inflation of the Carter administration, and the fact that the unemployment rate is higher now than when President Obama was inaugurated have convinced most white voters that the Democratic Party is economically incompetent.

For the most part whites who are not rich vote Republican for non economic reasons. On the important issue of crime they have gotten what they voted for. Since 1980 the prison population has tripled. The crime rate has declined by one third.

http://www.jacksonprogressive.com/issues/lawenforcement/punishment.pdf

33

Since 1980 the Democrats have let the issues of taxing and spending get away from them. As long as most voters got more from the government than they paid in taxes the Democratic Party dominated the country. I would like to return to those days. I want the voters to associate the government with good things they could not otherwise afford, good things given by the Democratic Party, and threatened by the Republican Party.

34

Well the trend is obvious in economic terms. Liberals are envious of the virility and prowess of the Freshwater economists, so when a wise politican makes the benevolent decision to cut taxes, they decide, in a fit of spite, to go on murderous rampages, commit more suicides, quit work and refuse to look for further jobs. Just in order to ruin the perfect correlations that would result from accurate demographic data that one ought to expct.

35

Incorrect, see link:

US Department of Labor Unemployment Data

Unemployment was 9.3% in 2009, and reached 9.6% in 2010, but is now 8.3%

After the complete and utter debacle orchestrated by the last Republican administration
I doubt too many people would blame Obama for the 9.6%, either, or for the fact
that the recovery is incomplete. IMO as long as the economy shows any improvement
in the next 8 months Obama will be reelected.

36

I think the real problem is the 1% capitalists spending their tax savings on cheap communist labor overseas, actively disfranchising the American worker.

37

[QUOTE=Doubticus]
I think the real problem is the 1% capitalists spending their tax savings on cheap communist labor overseas, actively disfranchising the American worker.
[/QUOTE]

I’d say that the average American consumer has more to do with it than your evil capitalist types. If US consumers were willing to pay a premium for expensive US labor in their products then the evil capitalists would be happy to oblige, since it’s no skin off their profit line. The trouble is, price is generally one of the large factors in most peoples calculation for many every day products…so, why pay for expensive US labor for something that could either be automated or made overseas? In some cases, of course, when there is a value add FOR expensive US (or German, or Japanese, etc etc) labor they are…but mostly, for every day items they aren’t.

Of course, don’t let logic get in the way of a good rant…

-XT

38

When Barack Obama was inaugurated in January 2009 the unemployment rate was 7.8 percent. By October 2009 it had risen to 10.0 percent. Since then it has generally been going down, but in February it was 8.3 percent.

39

I hope you’re right. :slight_smile:

40

I’m tired of people saying “virtually every economist will agree that…” Do any of you know any economists?

I am getting a PhD in the subject this summer and have taught full time for nearly a year now.

Economists agree on some general things, but not on things as specific as this. The answer should be… ready?

It depends.

It depends on the marginal productivity of the government sector (which is realistically impossible to know), and the marginal productivity on the private sector (which is much easier to guess at). Ideally, you would spend on both sectors such that $1 of spending gets the same marginal productivity in both sectors. But again, it is hard to know what the marginal productivity of the public sector (this is ‘decided’ by voters in an ‘ideal’ world).

Consider the absurdity of saying tax cuts create jobs, all the time. If we cut taxes to $0, no taxes whatsoever, we have no national defense. In several instances of history, this would have led to very bad results. Employment would be the least of our concerns had the USSR ended up dominating Europe, Asia, and South America. Had we stuck with no military in that situation, whose to say whether we would exist (same for WWII).

That’s an extreme example. We kindof agree on the extremes - that 100% taxation is definitely bad for growth, and that 0% is not great either.

There are two major fallacies that goes unspoken in the reply to this question.

  1. The purpose of the economy is not to maximize employment, but to utilize all the resources in the most efficient manner possible. If everyone knows their worth and employees know everything, unemployment shouldn’t exist (but it does because of imperfections, and lots of stuff that is highly debated).

  2. The answer to the question completely misses what public vs private goods are. According to economic theory, it is NOT inefficient if we all vote to give up all possessions and live in trees! Similarly, if the electorate decides to vote for high taxes, and high public services, this is OK as well! Or, if they vote for no taxes, no defense, we’re ok with that!

I am sick and tired of non economists answering economic questions. I see it all the time in the media, and I still get lectured on macroeconomics from my father (who is wrong about everything).

One major misconception that EVERYONE seems to have:

Governments cannot go bankrupt, and can borrow every year!

As long as the debt to GDP ratio is stable or going down (and not skyrocketing up), governments can borrow money every single year. See Romer’s textbook for the explanation. The stable condition is that the total debt doesn’t increase more than the interest rate.

If governments do undergo unsustainable borrowing, they still will not go “bankrupt.” Bankrupt implies, sell of assets, no longer exist. Countries do not die like people, and don’t have to pay back all the money they ever borrowed (which is owed to private investors). Instead, what happens is like what is going on in Greece. Sure, it really sucks in the short term (and I don’t mean to gloss over how actual people are being financially hit). But in the long run, it won’t destroy the country. There are many countries that aren’t in Greece’s financial position and have much more serious problems that could result in death of a country (war, civil war, generally internal violence, and oh yeah war.)

I won’t touch the theories on Inequality that were ignored in this answer either. Kuznets is the source on this. Inequality has risen, but unlike other advanced countries we have lots of unskilled immigrants coming from Latin America (which I am for). There are several possible reasons that are missed here, so I will leave that to others.