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Job creation by the wealthy is mostly a myth

We hear it continually; it is the mantra of conservatives: “We must give tax breaks to the wealthy so they can create more jobs … and higher taxes will stifle economic growth … because the rich are the job creators. … ” It is the basis of all the tax breaks given the top income groups in recent years, including the contentious extension of the Bush tax cuts to top brackets, last year. It is the common subject of conservatives on the talk shows.

Just last weekend, Paul Ryan, now the architect of the new Republican budget, reaffirmed his proposal to cut the top tax rate to 25 percent, claiming in his plan: … advancing pro-growth tax reforms, this budget is a jobs budget. It sends signals to investors, entrepreneurs, and job creators that a brighter future is still possible.

There is only one thing wrong with this premise and theory: It is not true! There is absolutely no empirical evidence to support such a claim. None! Yet, those who purport it continue to glibly make the claim as though it were fact. And for good reason: It gives them cover for avoiding the charge that they are merely attempting to make the rich richer; it also permits them to focus on deficit reduction through smaller government rather than having to address the revenue side of the equation as well.

Indeed, there is actually evidence that there is not only no correlation between granting the wealthy tax relief to “grow the economy,” there is even some evidence that the contrary is frequently true.

Since 1945, the increases in the federal deficit went up 4.2 percent under Democratic administrations and 36.4 percent under Republican presidents (source Congressional Budget Office (CBO).  That is not as relevant as the fact that the deficit increase was coincidental with GOP presidents who reduced taxes — most notably Ronald Reagan (deficit up11.2 percent  and 5.9 percent in his two terms); George H.W. Bush (6.5 percent); and especially George W. Bush (up 9 percent and10.7 percent). While it may be argued, this is not necessarily related to “job creation,” it is related to increases in GDP (debt/GDP ratio) or relative robustness of the economy. These presidents cut taxes, increased debt, but the economy did not grow accordingly. In short, as with historical “trickle down” strategies … it failed.

Looking at the evidence
Joel Slemrod, a professor of Stephan Ross School of Business at the University of Michigan and Harvard PhD who studies and writes about this phenomena, has noted: Judging by the political scene in Washington, one would think that low taxes were the main source of economic growth in the United States and around the world (even most Democrats dare not demand that President Bush’s tax cuts be rescinded), but there is no compelling evidence that high taxes impede economic growth.

Based on his above findings, Slemrod wrote: “There is no supportive evidence for the claim that low taxes guarantee prosperity. In fact, if you just plot out the points (internationally), you will find a clear, positive correlation between high tax rates and prosperity, and that is because developed countries are the ones with the high tax ratios.” And similarly regarding capital-gains tax reductions, “That argument is not implausible, but I know of no evidence that establishes a connection between prosperity and at what rate we tax capital gains.”

The fallacy is most apparent at the highest end of tax forgiveness. In recent years, the top 400 taxpayers had an average income of $344.8 million, up  from their average $263.3 million income in 2006, according to figures in a report that the IRS issued. Their effective income tax rate fell to 16.62 percent. That rate is lower than the typical effective income tax rate paid by Americans with incomes in the low six figures.

Giving the rich a tax break is obviously not needed — they figure out their own tax benefits. Yet, there is absolutely no real evidence that this generous tax advantage among the upper wealthy is incenting them to create new jobs. It simply is not happening. Folks this rich do not need to trivialize themselves creating new jobs, and Ryan’s tax proposal is simply ridiculous for this group; they can get along very well with about $300 million after taxes. The facts are further described in a new report on angel and venture capital investing in 2010.

Angel investors investing less
Virtually everyone concedes it will be small businesses, and often “start ups,” that will propel an improved economy, But despite the low tax rates (now extended), this report confirms that wealthy angel investors are not increasing investing in new job creation. In fact, they are investing less. Total investments in Q1,2 2010 were $8.5 billion, a decrease of 6.5 percent over Q1,2 2009, according to the Center for Venture Research at the University of New Hampshire. Angel investors have decreased their appetite for seed and start-up stage investing, with 26 percent of Q1,2 2010 angel investments in the seed and start-up stage, marking a steady decrease in the seed and start-up stage that began in 2008 (45 percent) and 2009 (35 percent), and it is the smallest percentage in seed and start-up investing for several years. This significant percentage of latent investors indicates that while many high-net-worth individuals may be qualified investors, they have not converted this interest into direct participation —  and it is not taxes that are driving their decisions.

In short, the premise and the promise that giving substantial tax breaks to the very wealthy will stimulate the economy, and “create new jobs,” simply has no basis in fact or reality. What it has done, factually, is to increase the deficits whenever it has been tried. It further confirms the failure of trickle-down economics, and it has made the already wealthy, wealthier. It also makes for great sound bites for conservative proponents of the plan. But what is has not done is to create new jobs as proponents have portrayed — because that is a myth.

Myles Spicer of Minnetonka has spent his business career as a professional writer and owned several successful ad agencies over the past 45 years.

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Comments (5)

  1. Submitted by rolf westgard on 04/12/2011 - 09:57 am.

    Amen.
    It is tax revenue that creates jobs. Our government spends it on the reseach that fostered many job creating industries. It was DARPA, not Al Gore, that founded the internet. Government research wasa instrumental in computers, communications, nuclear power, aircraft, electronics, many pharmaceuticals, etc. Our peerless university reseach is substanitaly supported by government contracts,and the list goes on.
    Some of our less technology oriented Presidents have described government as the problem. It isn’t. It is an essential element as we compete in a high tech world.

  2. Submitted by Greg Kapphahn on 04/12/2011 - 10:06 am.

    Of course it is true that cutting the taxes of the rich and keeping them artificially low simply makes the rich, especially those who already have far more resources than they could ever possibly need,

    Only makes those who already have far more than “everything,” even richer. The people who demand this and those who support them do so based on psychological dysfunctions which, at the same time render their desire for ever-greater wealth insatiable.

    BUT (and it’s a very BIG BUT at this point)…

    NO ONE in Washington is going to speak out against the freeloading, selfish, self-serving wealthy, nor against Wall Street excesses, nor against Big Business…

    Because of the “Citizens United” ruling rendered by the most corrupt and activist Supreme Court in US history.

    “Citizens United” hands the already wealthy and powerful the unlimited means to destroy any politician who offends them (by running endless and completely false and innacurate ads against those politicians during the next election).

    The Supreme Court, through the Citizens United decision, has ensured that, until a Constitutional Amendment is passed to, in essence, provide for one person, one speech (for or against),…

    an amendment which will dissolve the unholy marriage between money and speech by which the court currently guarantees those with massive amounts of money the ability to dominate our political processes and the politicians we elect,…

    Our nation’s capital and those whom we’ve elected to inhabit it will NEVER say or do anything that offends our nation’s wealthiest citizens and corporations.

    Of course the media will never report this story in this way because they are OWNED by those with massive resources, the on-air commentators are paid enough to dwell within the company of the more-than-comfortably rich, and they stand to make a very large amount of money (more than ever before) running the ads (invisibly) paid for by our nation’s wealthiest citizens in each biennial fall election season.

    Welcome to the America – the Corporate Oligarchy…

    An Oligarchy which will now rapidly come to be run by a small cabal of very wealthy overlords, but these will not be the overlords that have so stoked the fevered nightmares of our “conservative” friends.

    Rather it will be the overlords with whom they agree, whom they, themselves have supported, and whom they will continue to support even as the policies demanded by those overlords cause their conservative supporter’s lives to descend into the abyss.

  3. Submitted by myles spicer on 04/12/2011 - 11:47 am.

    In regard to Rolf’s comment, it is interesting to note that one of the most signficant job creators in the past two years was the government bailout of GM (now a robust employer).

    Having said that, it appears to me that most of the big corporations are not only NOT strong job creators, is many ways they are job eliminators. This is the result of how they are using their vast cache of funds — mostly buying other companies. the result is often “economies of scale” (ie job consolidation and contraction); and/or developing more jobs overseas.

    I readily admit that many entreprenural and wealthy individuals could stimulate the economy. My position is, however, it is not generous tax reductions that drive those decisions; rather it is factors such as ROI, viability of the management and products, and other such investment factors. Additionally, we are now giving uneeded tax breaks to many wealthy who have not, will not and likely never will have an interest in creating job growth.

  4. Submitted by Karen Sandness on 04/12/2011 - 12:52 pm.

    The wealthy rarely hire people other than servants or occasional private contractors with their personal wealth.

    But that brings me to another right-wing myth, that companies need low tax rates in order to make hiring possible.

    This myth sounds plausible to people who do not know how businesses are taxed. Most people, if they think about it all, probably assume that businesses are taxed like individuals: all their income minus a few deductions.

    They do not know that hiring employees actually REDUCES a company’s taxes. Wages and benefits for employees are paid with pre-tax dollars.

    Furthermore, despite another right-wing myth, namely, that companies just raise their prices to cover increased income taxes, raising revenue without any expenditures to balance them out actually increases a company’s taxes.

    Thus a company that takes in $1 million and spends $999,000 on wages and benefits, purchase of inventory, upgrading facilities, purchasing supplies, etc. pays taxes on only its $1000 in profits.

    If it were to double its prices and still spend only $999,000 on deductible expenses, it would be taxed on $1.001 million instead of on $1,000, a considerably larger tax burden.

    These are things that the right wing does not want widely known.

  5. Submitted by Kristy Grieger on 04/12/2011 - 01:13 pm.

    Piss off the rich, they piss on us by moving jobs overseas.

    Piss off the rich, they arrange to elect someone else who might be their puppet. And, perhaps slip money to the Court members?

    Piss off the rich, they raise “fees” (since they can’t call it a Tax).

    We’re watching companies like GE and BP not pay fed taxes, but not create jobs in the USA either. Congrats to them. This way the CEO, etc, can have 5 houses, 10 cars, a couple of airplanes and multiple wives, lovers and holder ons.

    The Small companies and start ups don’t want to create jobs because it costs them so much in the beginning. So, tell me who will create more jobs ??? We have to rely on Google ?

    The banks for example, created the whole Electronic banking mind-set so they could cut back on Human (employees) expenses. “Use our ATMs for cash and deposits….a 24 hr service for you!!!” Then they can cut teller jobs (adds to unemployment); Use the computer to pay bills (unemployment for the post office & banks) and so on. I love electronic banking.

    So, now they’ve cut their expenses for labor costs, and what do they do with all the savings they get ?? Add-on more fees because it’s been successful. More fees. More fees on fees. Swiping fees. Higher fees with higher gas prices.

    Less taxes, less government. It’s working well, doncha think ?

    You know, it’s not like me or others like to pay more taxes, but good grief, if there wasn’t some regulation, we’d end up like Afghanistan or Libya, etc.

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