How come jobs are created only (or primarily) by the wealthy?

Great Debates
1

In the last election cycle, it seemed (for a while anyway until he changed his stance) that Romney wanted to decrease taxes only on the wealthy, or at least increase taxes for eveyone else. The rationale for this was that the wealthy are the ones that create jobs, so if we give them more after-tax income there will be more jobs for the middle and lower classes. Everyone, the storyline went, benefits.

But why should this be? (If the line was that we have to decrease corporate taxes for more jobs I’d understand better, but we’re talking personal income tax here.)

If you give a rich person another $100,000 in after-tax income, she invests some of it and spends some of it. The amount invested might help beef up stock prices which can have a positive impact on business. The amount spent has a positive impact on business. After all, the more they sell the more they need workers to manufacture the goods and move the goods around and sell the goods, or to provide and sell the services.

But if you give 100 people each another $1,000 in after-tax income, they invest some and spend some.

Why isn’t the net impact on the economy the same in both scenarios?

2

They aren’t created by primarily the wealthy; that’s pure Republican propaganda. We live in a consumer driven economy; jobs are created by demand, not by rich people. A corporation will hire more people if and when they need more people to produce enough of their product to meet demand; not before. No matter how much extra money they have they aren’t going to hire people they don’t need to sit around doing nothing.

3

Its always seemed a specious argument to me give a multimillionaire £1000 and he shrugs his shoulders and buys what ever he was going to buy anyway, give £1000 to a poor person and he spends it on goods and services.

4

I don’t see any difference unless they are talking about rich people hiring personal servants in such a way as to literally and directly create the servant jobs. E.g. if Rich Guy has an extra $100,000 after taxes, he might decide that instead of buying another BMW, another 10,000 shares in a company, or a 3 month trip to Tahiti, they will hire a personal or family maid or two for the year. How many personal/household servant jobs (butler, maid, chauffeur, etc.) are there today?

If he buys the BMW, then he is arguably indirectly creating jobs by increasing demand for BMW’s and may result in new auto workers or new salesmen being hired, but then, as mentioned above, this would have an similar effect to 100 people buying a new computer or 5 people buying new Chevys for cash.

5

Well said.

6

The dogma is that the wealthy will (1) invest money into corporations which use the money to hire people, and (2) spend lots and lots of money on stuff, driving consumption up.

(1) isn’t really true; sometimes invested money is used to expand a company and hire people, but only if there’s increasing demand. And a lot of money is invested in companies that aren’t hiring, or lots of other places where the money really isn’t “creating jobs”.

(2) is true, but it’s more true for middle and lower income people. Wealthy people do spend a lot in absolute terms, but in relative terms they don’t spend as much on consumer goods. By contrast, nearly all income of less wealthy people is used to buy consumer goods: food, housing, cars, stuff. Poor people don’t lock up huge chunks of money in off-shore accounts.

7

Blame the Keynesians.
Keynesians view economic growth through aggregate demand. For most Dems, agg. demand is produced through government spending hence the outrageous spending costs we have now. Reagan also did this by funneling money to Defense. Republican Keynesians try to increase aggregate demand by putting more money in large corporations, the kind of corporations that have a nationwide impact. This is why the capital gains taxes and corporate taxes are so outrageously low.

What you are proposing is aggregate demand through individuals which is from the Austrian School. The Austrian way of thinking is verboten in this day and age kind of like global change deniers.

8

Romney and his ilk always say they’ll use that “extra money” to create jobs; but unless that was actually mandated by law, it was/is an empty promise.

As others have rightly pointed out, they’ll only create more jobs with that money if market conditions dictate a need. Otherwise they’ll just pocket the extra dough.

9

The problem is that although it’s a similar effect, it’s no where near as large an effect. As income increases, there’s a significantly decreasing marginal propensity to spend each new dollar. Give 10,000 people unemployment benefits and food stamps and virtually every penny will be instantly added to the economy. Give a few rich guys a few hundred thousand each and very little of it will.

10

The OP is using the argument about the multiplier effect of money circulating through an economy. That is of course true, but it’s not the argument that the Republicans made.

It’s part of the makers and takers theme they hammered through the election. A fraction of the economy starts businesses. By their actions, they not only produce goods and services for the rest of the economy but they create jobs to employ the non-job creators, who otherwise would have to rely on government handouts or charity.

This too is true. Obviously there are far fewer businesses than there are workers and therefore far fewer job creators.

The real argument, which begins after that sound bite ends, is: Given that in any society some people start businesses and other people work for them, how should the two groups be treated? That’s a huge issue and involves every aspect of human interaction, so most of the time the serious complications get ignored and trivial issues of tax policy get substituted. In the last election, the issues were whether to decrease capital gains taxes and whether to increase the marginal tax rate on the highest incomes. Republicans claimed that in all cases lower rates would “incentivize”* people to launch more businesses or hire more workers. Democrats claimed that the advantages of doing so were already great and that the small amounts of increased taxes asked for would not lessen incentive but would greatly benefit the economy and therefore the job creators by lowering the deficit.

It’s also true, as both sides state, that the majority of new jobs are created by small businesses just by the sheer number of them. The tax policy implications for small businesses are mixed, since only a small percentage of them make enough money to reach the highest tax bracket. OTOH, while they would benefit by lower capital gains taxes, many small businesses wouldn’t be paying those in any case.

That’s a serious and very real policy dispute. But it bears almost no resemblance to what got said by either side during the campaign.
*Not in my spell checker, so I get to use snarky quotes around it.

11

The actual argument made by Republicans in this case is somewhat different from the straw men above. The argument is: most jobs are created by small businesses, most such businesses are sole-proprietorships in which the profits are taxed as personal income, taxing such personal income at a higher rate will inhibit investment by the proprietor in the business, hence fewer jobs.

In response to the several market-driven comments above, there are elements of our economy that are innovation-driven before they are market driven, IMO, and the innovations are huge drivers of job creation. Of course, demand follows the innovation, but I think several of Apple’s innovations created demand. I would be inclined to credit jobs created by the iPod to be innovation-driven more than consumer driven.

12

No amount of innovation will create demand if people can’t afford to buy what you are offering.

13

The problem is that the part of the argument I bolded is specious and doesn’t make any sense. The proprietor invests in growing his business because he sees opportunity to grow (i.e. unmet demand). If I suddenly had a large tax refund, I’d invest it in the stock market or real estate or anything else, unless I also thought I could make a lot more money by investing it in my business. And if I thought I could make a lot more money investing in my business I’d do that regardless of my tax rate, so would every other small business owner.

14

I presented the argument as I have heard it not to espouse it, just to attempt to get the actual argument into this thread. And the bolded part is not specious, IMO, because if the profits of a small business, or any business, are taxed at a higher rate, the amount of that extra tax is no longer available to invest in the business, because the business no longer has it, the government does.

15

This is not something I entirely get. As I understand it monies reinvested in a business are not “profits” but expenses, that offset revenue before profit is calculated. So if you use your (potential) profit to expand your business you don’t pay tax on it because it’s not “profit” any more.

16

In a capitalist society, by definition, capitalists (which, almost inevitably, means wealthy people) own the means of production - factories, offices, and all sorts of machines and tools which people need in order to their jobs - and they employ people to actually use those means of production to make things, provide services, etc. There is thus an important sense in which, in a capitalist system, it is indeed the wealthy who create jobs. It does not, however, follow from that, that pushing more money in the direction of wealthy people, or making it easier for them to hold on to the money that they have, is a good way of encouraging them to create more jobs. It might well even have the opposite effect.

So yes, the wealthy (or a significant subset of them) do play a vital role in the creation of jobs in the sort of economy we have (which is certainly not the only possible sort of economy, and may not be the best), but the conclusions that many conservative politicians draw from this, that if we want more jobs to be created we should help the wealthy to become wealthier, simply does not follow (even staying within the capitalist framework). It might even be the case, in some circumstances, that if you raise taxes on the wealthy they might invest more of their money in enterprises that would provide employment for people, in order to gather in greater profits and remain wealthy. Otherwise, if they have plenty of money and are not likely to lose it, they might as well just sit on it, and have no real incentive to do anything likely to create jobs.

I am not actually saying that more heavily taxing the rich is the best way to get more jobs created in present circumstances, although I doubt if it would do any harm. I agree with those who are saying that the best way to increase employment, and improve the economic situation in the present circumstances, would be to channel money towards poorer people, in order to increase demand. Almost certainly the best way to achieve this is for the government to spend money on useful projects that will employ people. The point is not so much the jobs directly created by the government in this way (although those certainly will help) but the fact that this will put money in the pockets of formerly unemployed people, who will then want to spend that money, thus creating demand that the capitalist “job creators” will want to hire more people in order to meet, and those people that get hired by the capitalists will also have more money, and so create even more demand, in a virtuous cycle. (Virtuous, at least, until it goes too far and the economy overheats and crashes again. Governments, if they were rational economic actors rather than beholden to short-term political goals, could prevent this from happening by raising taxes, and building up surpluses, during good economic times.)

17

The logical extension of this argument is never to tax the profits of a business at all.

That’s a non-starter except to a few. The only real-world argument is over how to balance the competing interests. Even the tax-paying businesses benefit from the taxes they pay. Many people say that in our system they benefit disproportionally.

The argument as you present it is certainly specious. For one thing, the vast majority of small businesses never make over $250,000 in taxable income. Only 3-4% of all American households report gross incomes that high from any source whatsoever. The number of small business households who do so is therefore far less than 1%. (There are only 5,000,000 small businesses total and if the same 3-4% are high earners, which seems to be the case, then no more than 200,000 households are in play. That’s 1 in 1000 households.) Whether you call $250,000 wealthy is a semantic irrelevance. Most of this tiny slice of the population who get their $250,000 from arrangements in which their business profits are treated as personal income are at minimum upper middle class, and in any statistical sense part of the wealthiest sector of any community’s population.

Presenting this tiny increase of the highest marginal tax rate as an attack on small businesses is a falsehood. You cannot make the numbers add up. As I said, there is a serious argument to be made over tax policy, but this isn’t it. It’s flat-out lying.

18

I am pretty sure that the actual fact is that, in the sense that businesses do create jobs, most jobs are not, these days, created by small businesses. The vast majority of new jobs are actually created by large corporations.

19

Inc Magazine: Who Really Creates the Jobs?

To summarize: most jobs are created by a specific type of company - that type tends to be small and young, but not all small and young companies are this type, which the original researcher calls a “gazelle”

Being wealthy certainly helps you fund companies and some of those companies might fit this profile, but there’s no direct link.

20

That’s not true for the reason leahcim points out. If there’s enough demand in the community to support 10 more full time masseuses in my out call massage business, the money I invest in their 10 salaries is a business expense. It’s not being taxed at any rate. Whether or not I start hiring is going to be based on whether or not there’s enough people with money and sore backs, not my tax rate.

There might be a tiny bit of validity on a multi-year basis, but only in the tiniest minority of cases. For example, if you need a $10,000,000 warehouse to expand your business, you’re not going to get that money from current year income. **Crotalus ** would argue that if the business had been taxed slightly less for the past 5 years, it would have more money retained to invest in the warehouse today. But this too is specious - in any case the small business is going to finance the $10,000,000 with a construction loan, not savings. And if they can use a $10,000,000 warehouse to grow the business they’re going to find a way to do it, whether their top marginal rate is 28% or 33%.