Friday, February 11, 2011

Taxing the Rich Kills Jobs

This is a popular mantra and has been for quite some time. Unfortunately, I've never heard anyone, when speaking in the mainstream media anyway, explain why this should be true. They just assert and assert and assert. “Taxes on the wealthy kill jobs.” Given that, I'm going to have guess at what the logic is behind this mantra, and if I guess wrong, I hope you astute readers will correct me. The argument seems go like this: high income tax on the rich encourages them to keep more of their profits as income for themselves, rather than hiring workers, because they know the government is going to take a bunch of it and that the money sent to the government as taxes represents a diminished spending capacity, spending that would then create jobs. Simplified; if the government takes it, the rich don't spend it, and jobs are lost and/or, because the government takes it, the rich keep more of it to compensate rather than hiring people.

A couple of things.

In order for job creation to be connected to income that income has to be a function of profits. Profits are the positive difference between revenue and overhead, and of course, overhead is composed of salaries for employees, among other things. For owners and some top level executives at some businesses, I'm sure their income is a function of profits, and what they decide to take home as income from those profits would have an impact on job creation. But what percentage of America's wealthy falls into this category? I don't see Kevin Youkilis doing a lot of hiring. The only people in the Red Sox organization whose income is connected to hiring are John Henry et al, and maybe some of the upper management. Tito's income is not affected by whether or not the Red Sox hire another usher, hot dog vendor, or security guard. The same goes for successful actors, lottery winners, portfolio managers...

Another thing. Because we have an exchange economy, jobs are only created when wealth is spent. In a way, all spending of any kind is connected to creating jobs (including government spending, but somehow that doesn't count) and it's a lot easier for a million people to spend a million dollars than it is for one person to spend a million dollars. There just isn't enough time in the day for the super-wealthy to spend a significant portion of their wealth. So it sits in savings accounts, in funds, in investment portfolios, not being spent, and not creating jobs. Furthermore, the reach of individual spending, even when a ton of money is being spent is limited. How many jobs does the purchase of a Picasso really create? Or a limited edition Lamborghini? Sure, the Lamborghini creates jobs, but wouldn't ten people buying ten Fords create more?

Simply put, not enough rich people are connected to hiring for taxes on their income to affect hiring and there just isn't enough time in the day for the wealthy to spend enough of their money to really create a lot of jobs. As conservative critics joyfully point out (without ever, of course, confronting how the processes of lawmaking allows individual legislators to funnel money into their electoral districts) the Federal government is very good at spending money. If spending money creates jobs, then maybe we should let the Federal government do what its best at and create a bunch of jobs with revenue raised from a rational income tax.
Critics of the New Deal like to say that it wasn't Roosevelt's massive social spending programs that pulled the country out of the Depression; it was World War II. And those critics are both right and eye-gougingly stupid at the same time. World War II was a Federal spending project the size of which had never been seen in our Nation's history. And if you tack on another couple of farsighted bills (perhaps the high points of legislation in this country) the G. I. Bill and the Marshall Plan, that bill gets even higher.

Would higher taxes on the rich coupled with Federal spending projects solve the unemployment problem we're facing right now? A part of it, probably. But our economy is a complex system responding to many different factors and the Federal income tax rate is only one of them. Even if a truly progressive Federal income tax were instituted there are still lots of ways for wealthy Americans to make sure they keep way more money than they deserve.

And that's my biggest problem with the income taxes on the rich kill jobs argument. It completely ignores the complexity of the American economy. Federal taxes do play a role, but so do labor regulations in the Philippines and employer subsidized health insurance. The industry's new technology. The skills of the American workforce. The wants of the consumer. There's more to jobs than just tax rates. This will probably come up again, but my real problem with this argument is that it really isn't an argument at all in that it doesn't confront any of the complexity of the real world. It's not a point, it's like trying to get your buddy to do something by saying, “Come on....Come on...Come on,” or busting out a classic, “Because I said so,” to get your kids off the monkey bars. Given how our economy has changed and how our tax code has accumulated provisions, exceptions, and loopholes, I do agree that a revamping of our tax rates is in order, but if we want to do it well, the debate we have has to confront the complexity of the American economy. If we don't, we'll pass laws and enact policies without any real understanding of their consequences.


  1. I tried to write a meaningful post in response but I failed in my attempts. This book does it so much better than I can (see below). The amount of wealth controlled by the very few is staggering. Yet, when people say to tax the rich, the people they think about are millionaires. If it's going to work right we need to move the marker to billion not million. A millionaire has more in common with the guy begging outside his grocery store than he has with Oprah or Steve Jobs. One layoff or overinvesting in the stock market will really hurt the millionaire. Oprah might notice her holdings are worth less but it isn't going to stop her from giving out cars on her show.

  2. I definitely agree. What we need is a truly progressive income tax structure that reflects contemporary wealth. The big problem we have now is the tax brackets stop way too soon. You have these cusp or over the cusp millionaires paying the same tax rate as individuals who make hundreds of times that.

  3. The folks at "angry bear" have both studying the relationship between marginal tax rates and employment and fairly well documented that below a certain ceiling (50-60%) increasing the tax rates on the rich actually creates jobs.

    The facts have a well known liberal bias.

  4. Thanks for the link. The funny thing about the recent tax debates was that they were over returning the tax rate to a Clinton era level, i.e. to a time when unemployment, even with a recent recession, was not the huge problem it is today.