Part 1: On Election Mythology
Part 2: On Trajectories and Private Sector Jobs
Part 3: On Deficits, Taxes, and The Figment of Our Collective Imagination
First and foremost, let's call a spade a spade. "Job Creators" is nothing more than political-spin-speak for "rich people." To that end, we’ve had massive tax cuts on “job creators” for the past 11 years. Obama has tried to end those specific cuts while keeping tax cuts for the middle class, but he has admittedly had no success in the GOP-led House.
The heavy lifting, though, in terms of cutting taxes on the very tippy top was done in 2001 and 2003 under George W. Bush. What have those tax cuts to “job creators” given us?
Before we get to the numbers, let's talk about the rationale and some of the myths. The theory on tax cuts, as summarized by David Leonhardt in the New York Times, is this:
The main economic argument for tax cuts is simple enough. In the short term, they put money in people’s pockets. Longer term, people will presumably work harder if they keep more of the next dollar they earn. They will work more hours or expand their small business. This argument dominates the political debate.
But tax cuts have other effects that receive less attention — and that can slow economic growth. Somebody who cares about hitting a specific income target, like $1 million, might work less hard after receiving a tax cut. And all else equal, tax cuts increase the deficit, as Mr. Bush’s did, which creates other economic problems.
There's no doubt that having some extra capital in the hands of startup businesses and other small operations would help. However, in researching, I stumbled across an interesting piece from 2010 by Peter Cohan of Forbes. In it, he interviewed 17 startup CEOs, and slipped in this nugget:
One other thing -- with a single exception -- none of the Job Creators I talked with plan to hire people solely because of the tax incentives being discussed in Washington. Since many of them have been losing money during their startup stage, they don't need the tax breaks. And even if they did, they say such incentives wouldn't be an important factor in their decision to create new jobs.
So, while extra capital can certainly help small businesses, from Cohan's (albeit small) sample size, most people are more concerned with growing their businesses regardless of the tax policies enacted. Or, to put it another way, they're not going to hire people ONLY because of tax cuts, which throws the notion that we NEED tax cuts on "job creators" out the window. It should also be pointed out that most startups lose money during their initial years, these are hardly the wealthy incomes that are going to see a tax increase under Obama. We'll have more on this below.
Much like Bush's early agenda, tax cuts--skewed toward the wealthy, no matter what Romney may say to the contrary--are the cornerstone of Romney's recovery plan. So, is there any evidence that tax cuts really drive growth in the employment market? Let's look at some raw employment numbers.
When Bush came in in 2001, the U6 unemployment rate was 7.3%. Bush inherited a budget surplus and an economy not yet in recession, immediately cut taxes, and saw that rate jump to a peak of 10.4% in 2003 before settling back to 9.3% by the end of his first term. When Bush left in 01/2009, the U6 was 14.2%. The private sector lost a total of 646,000 jobs over Bush's eight years in office, though it must be pointed out that private sector jobs dropped from 2001 through 2003, rose from 2004 through 2007, and then fell off a cliff in 2008.
Obviously, there are many factors that affect job creation in this context. But, is there evidence that sustained tax cuts created jobs at a better rate than without them? It wouldn't appear so. It would appear that tax cuts passed by Bush in 2001 and 2003 had mixed results, based purely on the numbers above. So, let's ask a rhetorical question: do tax cuts create jobs?
One of the better articles I've read on the subject is by Rick Ungar, who writes for Forbes (though he is admittedly their "token lefty" in his own words). He reviews two different measuring sticks to determine whether George W. Bush's massive tax cut package for the very wealthy spurred job growth, as compared to the job growth rates under other two-term presidents over the last half-century. And, to give Bush the best possible outcome, he even didn't factor in the last year of Bush's presidency in which the economy was bleeding jobs. What were the results of his study?
So, should we argue over which measuring stick is the better judge of success?
No need. Let’s use them both because, whether we use one tool or the other, the growth in jobs following the Bush tax cuts remains surprisingly small in comparison to the job growth achieved by two-term presidents without the benefit of the mega-tax cuts for the wealthiest among us as delivered by President Bush.
Using the CES survey, employment during the period measured grew 4.5 percent. Using the CPS approach, employment grew 7 percent—both numbers producing a large yawn for Gary Burtless, a senior policy analysts with the centrist Brookings Institute, because neither number is very impressive, particularly if one is seeking to make the case that cutting taxes on the so called ‘job creators’ equals job growth.
By Mr. Burtless’ calculations, the Reagan years produced double-digit job growth. Same goes for the Clinton era, the 8 years of the combined Nixon and Ford administrations, and the 8 years of the combined Lyndon Johnson and John F. Kennedy terms (both Ford and Johnson finished the terms of their predecessors.) Indeed, the only two-term president in modern history to experience job growth as sluggish as that experienced during the President George W. Bush years used in this analysis, even before the recession set in, was Dwight D. Eisenhower.
...
So what does this data tell us?
For starters, given that all of these two-term presidents experienced better job growth without the assistance of the massive tax cuts for the wealthy provided by President George W. Bush, it certainly seems fair to note that a certain amount of job growth would have come during the years George W. was president—whether he had given us the tax cuts or not.
And if one feels the need to argue that tax cuts are the great driver of employment, the comparative numbers presented make it shockingly clear that these tax benefits to the wealthy do little to nothing to even keep up with the employment increases under all of the other two term presidents of the modern era, with the exception of poor old Ike.
So, in Ungar's summaries, we see that, even without counting the dreadful last year of Bush's presidency, his rate of job growth was much lower than any other two term president this side of Eisenhower. And, his last note is important. As I noted in previous posts, the rate of growth that Romney's campaign numbers cite is SLOWER than the current job growth trajectory of Obama's recovery.
Not exactly a ringing endorsement for tax cuts, eh?
In addition, two other snippets come from the NYT article I linked to above. First, a September report from the Congressional Research Service found that over a 65 year span changes to the top tax rate “do not appear correlated with economic growth.” CRS is a part of the legislative branch within the Library of Congress, and confidentially works primarily and directly for Members of Congress, their Committees and staff. They are non-partisan.
For the second item, we'll give the final word to Donald Marron, who was quoted in the NYT article to which I linked above: “At the level of taxes we’ve been at the last couple decades and the magnitude of the changes we’ve had, it’s hard to make the argument that tax rates have a big effect on economic growth.”
Donald Marron is the director of the Tax Policy Center, and was a former member of the Bush administration.
Romney would be inheriting a less stable economy than Bush did, but one at least heading in a positive direction over the previous three years. Bush's job rates grew more slowly than any other two-term president in 50 years. And if you factor in Bush's entire legacy, where is the evidence that his tax cuts did ANYTHING to help the economy? Further, is there ANY precedent that we should do the exact same thing on a much larger scale now?
But what about Obama's plans, you might ask? The first issue: many small business owners complain that raising their taxes will stop their growth, because higher taxes on higher income levels remove the incentive to grow to that point. Some argue that small businesses might even lay people off to get under that threshold. Some even argue that a tax increase might force them out of business. Very scary stuff, indeed.
However, as Matthew Yglesias points out in Slate, it doesn't really work that way at all. In order to see ANY tax increase, a small business owner must be making AT LEAST $250,000 in profit each year. That means that, after ALL of their expenses and overheard, they're making $250,000. And, per Yglesias (emphasis mine),
The way U.S. income tax brackets work is that taxes are levied on marginal income. In other words, the rate applied to income earned over the $250,000 threshold is irrelevant to the first $250,000 worth of taxable income. If you have $250,010 of taxable earnings then only that last $10 is taxed at the higher rate. In all cases, higher pre-tax earnings lead to higher after-tax income.
Similarly, a curiously large number of the small business owners surveyed by House Republicans don’t seem to understand the difference between profits and revenues. The issue here is that some (but not all) small firms are organized as what are called “pass-through entities” for tax purposes. ... A pass-through entity... pays no taxes. Instead its profits are distributed to its owners (typically a small group of people) and they pay income—but not payroll—taxes on the proceeds.
So, it would seem that all these doomsday scenarios about what will be happening to small business if taxes are raised on the rich are either intentionally misleading, or are due to a lack of understanding of how the tax code actually works. I'll admit, I had to look it up myself.
Most importantly, even John Boehner has admitted that only 3% of people classified as "small businesses" will face any tax increase at all. The scare tactic that "half of small business income will see higher taxes" is because that top 3% makes HALF OF THE SMALL BUSINESS INCOME. Think about that for a second. 97% of "small businesses" make less than $250,000 a year, and therefore will see NO TAX INCREASE.
Second, does raising those taxes on the top earners stunt overall job growth? Recent history would actually suggest that it might have the opposite effect and spur MORE job growth. In fact, raising taxes to help combat rising deficits has happened twice in the past 20+ years: despite his campaign promises, George H. W. Bush raised taxes in his 1990 budget at the behest of the Democratic Congress, and Bill Clinton raised them again in 1993.
There was a recession in 1991, but from January 1990 through December of 2000, the economy added 23.672 million jobs, of which 20.943 million were private sector jobs. Obviously, there was a tech boom during that period of time, but it doesn't appear that the "job creators" were too strapped for cash because of higher taxes to invest in those jobs.
This isn't to say that Obama's plan to raise taxes on the wealthy will create 20 million jobs. After all, it's not intellectually honest to quote someone who says that the tax rate of the top 1% doesn't directly affect the economy and then turn around and say raising taxes will create jobs. I'm not saying that. But, consider: the CBO has already predicted that the economy would create 9 million jobs:
The Congressional Budget Office is required to consider the effects of the so-called “fiscal cliff” if a year-end budget deal is not reached, which many experts believe would push the country into a recession. But even with that caveat, the nonpartisan agency assumes 9.06 million jobs will be created between 2013 and 2017. (This is a revision downward; CBO had estimated 11 million in January.)
The biggest caveat is that the result of Bush 41's and Clinton's tax increases is that, by the end of the decade, the federal budget deficit was gone. After eight years of Bush 43 and tax cuts, the budget deficit was back to $1.3 trillion.
So, whose tax plan is better? History tells us it's Obama's, by a HUGE margin. A decade of higher taxes, during which the economy was NOT stalled and created almost 21 million private sector jobs and erased deficits in the budget, or eight years of tax cuts that produced no net job gains in the private sector and blew a hole of over a trillion dollars in the yearly budget deficit?
This shouldn't be hard to figure out.
Tomorrow, we'll attempt to wrap this up with Part 5: Election Minutiae.
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