Would the Removal of Tax …

Would the Removal of Tax Cuts for high-income people reduce jobs as claimed by the Kill Jobs Believers, hereafter the KJB? Most people would answer Doubtful and for good reason. It doesn’t meet the test of common sense. Unfortunately many of our political leaders don’t have common sense. Let’s walk them through what’s happening. The basic idea for Tax Cuts proposed by the KJB is that the Rich can SAVE more than the Poor since the Poor have to spend all their income on just staying alive. Any tax cut for the Rich will increase their Savings. The KJB’s next step is to say that Savings will be Invested. Their unspoken assumption that follows this is that Investment will be in Plant & Equipment that will create jobs in the USA. There are three problems with that assumption. First, a cut in personal income taxes could, just as easily, result in Spending, not Savings. Since when is the Poor’s Spending any less Job Creating than the Rich’s Spending? Second, Investment in Plant & Equipment might be in “Job Replacement”, meaning replacing workers with machines or maybe in “Movement Overseas.” Either way that results in Job Losses. Third, people don’t Invest in Jobs anymore; they invest in the Financial Markets. At one time Savings went into Banks that, way back then, lent the money to Businesses who, in turn, created jobs. Now Savings goes to Financial Advisors who place money in Financial Investments. Where that money goes is a complicated story full of acronyms – CDs, MMMFs, MBOs, Hedge Funds, CMOs, Credit Default Swaps, etc. The KJB argue that these new “instruments” make the financial market more efficient by spreading risk. Even though the growth of the “so called contribution” (Value Added) by the Financial Sector has risen dramatically in the last decade is our economy better off because of that? Common sense again says No Way. The recent economic events seem to more than challenge that idea; it appears more like all these new financial dealings did was increase catastrophic (systemic) risk. Some working people go so far as to say that the High Income Folks engaged in High Stakes Gambling that the American taxpayers had to cover when the Rich’s losses showed up. In truth cutting personal income taxes does not guarantee Increased Jobs; it is just a hope or a prayer that it will. As a result of the “temporary” tax cut in 2003 it appears that the freed money went into the financial markets and helped create a real estate bubble that almost sent us into a depression, now aptly titled The Great Recession.

So what would the removal of tax breaks for the high rollers do? It might decrease their Spending, although that is probably not much of a big deal. Will it decrease Investment in US-Based Plant & Equipment? There are plenty of data to support the facts that Banks have lots of money to lend, just nothing great to lend to. Corporations are also flush with Cash from Retained Earnings, which means they can internally fund any new investment opportunities. So there appears to be no “Crowding Out” if we allow those 2003 tax breaks to expire as they were legislated to do. What would the high rollers do when required to pay more in taxes? It seems only logical to conclude they might invest smarter and more on real business opportunities rather than chasing esoteric financial dreams, that is truly take care of their remaining stash of cash. Stated another way, there would be less froth in the market – a darn good thing. Cynically one might also add that since there would be now less new federal debt so the high rollers wouldn’t be buying it and clipping more coupons. That is to say we’d be returning the money from Paul’s pocket back to Peter’s.

Enacting Fiscal Policies of General Income Tax Rate Cuts that “hope” the outcome will be correct just doesn’t just work. This country needs a “Jobs Tax Credit”, where the business firm has to hire a US worker to get it. We did that with an “Investment Tax Credit” and it worked. We might think of having the Federal General Fund pay all the new worker’s Social Security and Medicare payments for, say, three years. Small and mid-sized businesses, which are the job creators, would step forward.

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About newmexicoreflections

Retired Economist
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