Job Creators, Taxes, and Inequality

Job Creators, Taxes, and Inequality

“Corporations are job creators.”
“We would have more jobs if taxes on the rich were lower.”
“Taxing the rich takes money away from those who earn it.”
“Corporations would create more jobs if the government would let them keep more of their money.”
“The reason why the economy is hurting is because of oppressive taxes on the rich and on corporations.”
“Progressive taxes and welfare are socialist wealth redistributions that destroy the economy.”
“If you raise taxes on job creators, it will destroy the economy”.

We hear such statements ad nauseum. Surely they must be true if everybody is saying so, right? Even raising revenue for the government by closing tax loopholes for the wealthiest is considered heresy. If we close these loopholes, it amounts to “raising taxes on job creators”.

What are the merits of such claims? Would raising taxes on the rich be a job-killer, because that is what happens when you tax “job creators”?

The first question to ask is this: are rich corporations and individuals really job-creators? For the sake of argument, let’s just assume for now that they are. So, will raising taxes on these job creators really kill jobs?

Let’s think through the process of how this all works. Instead of relying on some vague theory or political rhetoric, think through the actual process. First of all, income taxes, whatever the rates, only apply to pretax gains. The original investment is not taxed, only the gains. For any given income tax rate, people can use their BEFORE-TAX income on something that can be written off on their tax return, thus reducing their taxes, or they can use this income on something that WON’T reduce their taxes. In that case, they will be paying taxes at the marginal rate on that income. If they hire workers, and therefore “create jobs”, then the salaries and benefits that they pay out to workers become business expenses. They won’t pay taxes on this money because it is deducted from revenue before computing taxable income. If they decide not to hire workers, and keep the money as profits, then they WILL have to pay taxes on this money. Unless they find somewhere else to invest the money, an investment in something that does NOT create jobs, they will have to pay taxes on this money. But if they hire workers with the money, then they won’t have to pay taxes on it. That is how the tax code works. Hire workers, pay fewer taxes. Don’t hire workers, and either pay more taxes or invest in something that doesn’t create jobs.

To repeat: for any given tax rate, hire workers and pay fewer taxes. Don’t hire workers, and either pay more taxes or invest in something that doesn’t create jobs. That is what happens for any given tax rate. What happens when the tax rate changes?

If you increase the tax rates on these job creators, then the tax that they pay on everything EXCEPT jobs will go up. They still won’t have to pay taxes on the money that they spend for employee compensation. A tax increase will give them an incentive to invest in the business, because it is the cost of NOT investing that goes up. The cost of investing does not increase. An increase in the income tax rate won’t give them an incentive NOT to invest in job creation. This will not be an incentive for killing jobs; it will be an incentive for creating jobs. Job creation takes money out of the column that is taxable and puts it in the column that is not taxable. This is simple mathematics; not political rhetoric, but mathematics.

If you decrease the tax rates on these job creators, then there will be no added incentive to create jobs. The amount of income taxes paid on employee salaries and benefits for these job creators is zero either way. What a tax rate decrease does is decrease the taxes that they have to pay on the money that they aren’t using to create jobs anyway. The cost of paying for jobs does not go up, but the cost of NOT creating jobs goes down. It is an incentive for them to keep more profits that are taxable. It is in no way an incentive for them to spend the money on job creation; again, mathematics and not rhetoric.

Please re-read from the beginning if you don’t understand this concept so far. This is a concept that is important to our economy today. It explains to a large degree how we have been spending so much time struggling through a “jobless recovery” even as large corporations are reporting record profits and record cash levels. These corporations already have more cash than they are investing back into their businesses. Interest rates for them to finance job creation through borrowing are at historical lows, near zero. Yet they aren’t investing this money on jobs. The wealthiest individuals have recovered from the recession while the incomes of everybody else have fallen, increasing the already-wide wealth gap. With this amount of cash and job-creating ability already, why do we have so many unemployed people? The political rhetoric is that these job creators just need one more benefit from us, on top of their record cash reserves, in the form of lower taxes, in order for them to have an incentive to create jobs. Or that the millions of unemployed Americans are all lazy anyway. Or that somehow, these workers aren’t qualified to take back the jobs that they were laid off from.

That is the political rhetoric. The reality is something different entirely. The reality is that:

  1. Raising taxes on the rich doesn’t kill jobs, and lowering taxes on the rich doesn’t create jobs, as explained above.
  2. The rich are not the real job creators, as explained below.

For the above explanation about taxes, I left in the assumption that the rich are the ones that create jobs in order to focus on the effects of tax rates for the richest Americans. But the truth is that consumers are the ones that create jobs. Tax rates for the rich have nothing to do with it. If a business of any size sees a way to increase before-tax profits, it would be to their advantage to do so. They want to keep their tax bills at a minimum, of course, but raising before-tax profits will also raise after-tax profits. Very little money for rich individuals and for corporations will be caught up in the margin where the additional before-tax profits will be lower than the additional taxes. If any business decision-makers worry about the taxes more than the actual effects on the bottom line, then they aren’t making wise decisions. Increasing before-tax profits for all practical purposes is the same thing as increasing after-tax profits.

If businesses or potential businesses see a demand for their products and/or services that will generate a profit, they will do what they can to get that profit. If it means hiring more workers in order to meet that demand, and the cost of additional workers is lower than the addition to potential profits, then they will hire more workers. The income tax rate on the business has nothing to do with it. What is needed to make it all happen is consumer demand. The people who will do the buying in the economy are the ones who need the buying power to make it all happen. It is a consumer-driven economy. More income for the middle class, for the working poor and even for the non-workers will create demand. Consumer income and consumer confidence in the economy create jobs.

I mentioned consumer confidence. What about business confidence? Business confidence starts with consumer demand. If the masses in the population aren’t buying, then there won’t be any business confidence. Businesses prefer stable government policies for sure, but most business owners won’t tell you that stable higher income tax rates will create just as much business confidence, in terms of creating jobs, as stable lower income tax rates. But that is the truth. Eliminating loopholes will create more stability than anything, because it levels the playing field. Businesses will quit scrambling around, paying expensive tax lawyers and accountants to look for loopholes if the loopholes no longer exist.

The rich benefit financially, and directly, from the infrastructure more than the poor do. The rich benefit from the spending patterns of the poor, through investments. The more money the poor have to spend, the more income the rich make off of domestic investments. Businesses (and investments) are successful only if the economy produces enough demand.

So, you don’t want to raise taxes on “job creators”? Then quit demanding that the poor pay more taxes. Quit backing policies that have been destroying the middle class for the past 30 years. Prior to 1981, incomes for all classes rose together as the economy grew. The upper classes got more than the lower classes, but all gained at equivalent rates. Since then, the top 10% have received more than the rest. Even the gains of the top 10% have paled in comparisons to the gains of the top 1%. Those are economic facts that are readily available to anybody who cares to fact-check any of this. All of this is the result of changes in economic policies in Washington. These policies have created a situation in which income that would have been distributed throughout all income levels, based on policies that were in effect throughout the 1950s all the way through 1980, is now all going directly to the top. And this income is staying at the top. It is not trickling down. Wealth has been redistributed; but not from rich to poor like the political rhetoric says. Wealth never gets redistributed from rich to poor in the United States today. It always gets redistributed from poor and middle class to rich. The wealthiest have always received the most income, as a group. But the redistribution has occurred because of policy changes that have allowed those at the very top to keep all of the income gains, including the income that used to go to the middle-class. The American Dream of upward mobility is available to fewer and fewer people.

Here is a related hot issue that is driven by rhetoric: why raise taxes on the rich when they already pay most of the taxes? Well, they pay most of the income taxes, but not most of the other taxes. The other taxes are mostly regressive. The income tax used to be very progressive to balance this out. History shows that rhetoric stating that our current problems are caused by “oppressive” income taxes on rich individuals and corporations is untrue. Between 1950 and 1980, the top marginal income tax rates for individuals varied from time to time, ranging between 70% and 92%; at the same time, the top marginal income tax rates for corporations ranged between 42% and 52.8%. Compare that to the same rates between 1982 and 2013: 28% to 50% for individuals and 34% to 46% for corporations. The economy and the middle class grew more during the decades with the higher income tax rates; real wages for workers were higher.

But policies of the past 30 years have taken away much of the balance. The rich end up paying more income taxes because the policies have given them a much larger share of the income, and put more people under the taxable limit for income. Higher taxes on the rich didn’t create a situation where the rich pay more income taxes – lower taxes on the rich did. The share of total taxes paid by the rich has gone up due to the rich having a much higher share of the total income, but the share of their income that is taken away in taxes has gone way down, to historically low levels. Policies in Washington have created this situation. Taking away money from those who earn it in order to give it to those who don’t earn it? That has already been done. The working class has had their incomes confiscated and given to the very rich.

The concept of “they earn it, so let them keep it” makes little sense when changes in policy have determined who receives it. Why should that concept apply after the policy changes but not before the policy changes?

Whether the wealthy are actually “earning” this redistribution or not, it is going to happen. The fact that it happens is not proof that it is somehow “earned”; the system says it is going to happen anyway. Arguing that it is their money that they have “earned” is a classic circular argument [“They receive it because they earn it”. “How do you know that they earn it?” “I know because they receive it”].

The wages paid to workers used to go up when their productivity went up. The economy thrived when that happened. But for the past 30 years, workers’ wages have not gone up while the workers’ productivity has skyrocketed. This is not some liberal rhetoric. This is not some liberal theory. This is economic fact.

The result of the policies of the past 30 years is that the wealth gap and income gap between the very rich and everybody else are the highest that they have been since just before the Great Depression. We are seeing signs that this is no mere coincidence.

When financial investments earn income for investors, but do not create jobs, they create bubbles instead. These bubbles will eventually burst; guess who pays when they do? Oh, and one more “investment” that contributes to the problem: Political donations to support politicians who promise to maintain this system.

A version of this essay is included as a chapter in the book Common Misconceptions of Economic Policy by Jerry Wyant. You can purchase this book in paperback form from Amazon and other online book distributors. The list price is $12.99 (only $9.99 using discount code TA9GTK7E when ordering, depending on the distribution channel). Or if you prefer, you can download a digital version on your device (Kindle, Nook, etc.) for $4.99.

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Jerry Wyant