Tax Rates and Job Creators

In the debate over extending the Bush Tax Cuts Republicans continued their argument that higher taxes on millionaires, the people Republicans refer to as “Job Creators”, will result in fewer jobs being created. But it’s just not true. Higher taxes on job creators don’t mean fewer jobs are created. Lower taxes on job creators don’t mean more jobs are created.

Part of the role of our government for the last eighty years has been redistribution, a compromise that grew out of the Great Depression. Redistribution has taken many different forms, from federal funding for interstate highways to public education to support for unions and minimum wage laws. As the last election showed, most Americans do support this role for government – most Americans do support redistribution. And generally redistribution has served our country very well – most economists believe it was a key to creating the consumer economy that we have.

There has been a branch of the Republican Party, the Ideological Conservatives, which rejected the compromise. The Ideological Conservatives viewed redistribution, or any step away from an unfettered free market, as a step towards socialism. They argued that redistribution, instead of helping to create our middle class, cost us jobs – the higher taxes on the wealthy needed to fund redistribution not only took money out of the hands of Job Creators but also caused wealthy people to be less motivated to invest in new business ventures that would create new jobs.

The argument never made much sense intellectually. Entrepreneurs make their investment decisions based on the likelihood of being able to sell their product or service at a profit, not the tax rate they pay on their profit. Interest on savings gets taxed too. Even prior to the Bush Tax cuts, the difference in the tax rates on income or capital gains versus interest was nominal enough not to be a deciding factor in investment decisions. And if an entrepreneur were to decide to pass on a project because the potential profit wasn’t high enough to justify this nominal difference in tax rates, its not like the money leaves our economy. The entrepreneur puts it in the stock market or in a bank, and the bank then loans the money to someone else who uses it to fund their business activities.

Even a cursory look at our history shows the argument to be untrue. After the 2001 Bush Tax Cuts job growth only increased by 1/2%, and through all eight years of Bush’s term the number of jobs shrank (and investment dropped). Clinton raised taxes and the job growth during his two terms was higher than during Ronald Reagan’s. Our country experienced its highest job growth during Truman’s administration, when the top tax rate was 82%. Time and again our history has proven that the tax rate paid by the wealthiest people in our country, those people the Ideological Conservatives refer to as Job Creators, has no connection with the number of jobs created.

And now the Congressional Research Service, a non-partisan research arm of the Library of Congress, has confirmed the lack of connection. After several decades of having ideological conservatives make the claim, the Congressional Research Service finally did a study of the impact of tax rates on job growth. To no one’s surprise, the report found that there was no correlation. The report was completed prior to the election, but Republican leaders blocked its release. However even in draft form the report is definitive – it verifies that there is no factual basis for the suggestion that the tax rate paid by the wealthy has any correlation to job growth in our country.

This Congressional Research Service report has been a backdrop for the pushing and pulling between the White House and the Republican leadership, and it’s left the Republicans in a tough position. The massive reduction in taxes for Job Creators in the Bush years didn’t generate a flood of new jobs, and as the last election proved most Americans are increasingly skeptical of the Republican claims. It’s hard to imagine the Republican will back away from this position and certainly the wealthy donors that spent a billion dollars trying to unseat the President would be greatly disappointed if they did. But it’s also hard to imagine Republicans can win the argument over extending tax cuts for the wealthy with an argument that just isn’t true.

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