The big lie about tax cuts and jobs

October 17, 2012

Tax cuts for business have been a complete failure at creating jobs, but they serve another purpose for political leaders: creating a fiscal train wreck to justify austerity.

WE'RE TOLD that the 2012 presidential campaign offers a stark choice--a corporate executive vs. a community organizer, the brash nearly-billionaire vs. the empathetic everyman.

But on the most important issue for voters in this election--employment and the economy--the candidates agree on an awful lot. It may not seem like it when you hear the talking points designed to emphasize the difference between the two--or listen to the media's obsessive analysis of who denounced who about what and when. But once you cut through the rhetoric, the candidates agree on the main way to produce more jobs.

Tax cuts for business. And if that doesn't work, more tax cuts.

Sure, at the Tuesday night presidential debate, Obama--maybe because he was fully awake this time--emphasized that he, unlike Romney, wanted to raise income tax rates affecting the richest 2 percent of U.S. households to the levels they were at during the presidency of Bill Clinton in the 1990s. What Obama didn't point out is that he had a chance to do this by rescinding the Bush tax cuts for the super-rich at the end of 2010--and he capitulated to the Republicans.

Mitt Romney and Barack Obama share the stage at their first debate

Nevertheless, while Obama promised to repeal the Bush tax cuts for the wealthy, he also said he wanted to reduce taxes on bankers and businesses. In a debate where Obama was desperate to show how different he is from Romney, he stressed several times one point of agreement between the two--that taxes on corporations are too high, and they ought to be reduced.

This reflects something that has become an article of faith in mainstream politics--that the best way to create jobs is to cut taxes on businesses so they'll hire workers. The flip side of that consensus is that the worst way to create jobs is a government program that actually hires people--like, you know, teachers, social workers, highway construction crews, structural engineers who know how to keep bridges from collapsing...

Once confined to a minority of fiscal conservatives who then found themselves in power during the administration of Republican Ronald Reagan, the theory of "trickle-down economics" dominates economic policy across the mainstream political spectrum--even if not many people use the term anymore.

THE BASIC idea is that if you cut taxes on corporations, that gives them more cash that they can use to invest, which will increase overall employment as more people are hired, and incomes will rise throughout society. In other words, more money in the hands of business and the rich will eventually "trickle down" to the rest of us.

There are two problems, though. One is that "trickle-down economics" doesn't work, and never has. And two is that tax cuts for the rich starve the government of resources that could make a difference.

Even the Congressional Budget Office, the government's own nonpartisan agency for analyzing economic data, acknowledges that cutting taxes won't create jobs, especially in a weak economy: "Increasing the after-tax income of businesses typically does not create much incentive for them to hire more workers in order to produce more, because production depends principally on their ability to sell their products."

Tax rates on business and the wealthy in the U.S. are already very low by historical standards and--despite the squawking by CEOs and the financial press--on the low end when compared to other industrialized countries.

One result is that U.S. corporations are sitting on a record hoard of cash, estimated at as much as $2 trillion. Why? Because corporations won't make new investments until they believe those investments will turn a profit. The money that's supposed to trickle down to the rest of us is trickling into the big pockets of the super-rich.

Instead of creating jobs, cutting taxes for the wealthy and corporations...makes the wealthy and corporations richer still! One of the 20th century's leading mainstream economists, John Kenneth Galbraith, derisively referred to the "trickle-down" methods of his day as the horse-and-sparrow theory: "If you feed the horse enough oats, some will pass through to the road for the sparrows."

That's true today. The neoliberal consensus for free markets, government spending cuts, privatization and tax cuts for the rich serves the interests of the 1 percent--the same elite that already made off with the lion's share of the economy's gains for the last few decades.

The rest of us get crap.

DON'T TAKE our word for it that the mania for tax cuts is a bipartisan consensus. Listen to the presidential candidates.

In the first debate, Mitt Romney said: "Fifty-four percent of America's workers work in businesses that are taxed not at the corporate tax rate, but at the individual tax rate. And if we lower that rate, they will be able to hire more people. For me, this is about jobs. This is about getting jobs for the American people."

Obama's "counter" was: "When it comes to our tax code, Governor Romney and I both agree that our corporate tax rate is too high, so I want to lower it, particularly for manufacturing, taking it down to 25 percent."

Both men said pretty much the same in the second debate.

Romney, of course, is explicit--he's a "trickle-down" fundamentalist. One of his last comments in the second debate was to repeat the same sentence--"Government doesn't create jobs"--over and over, like a mantra.

But Barack Obama and the Democrats are no less dedicated to this proposition. Even the 2009 stimulus law--passed during the first month of the Obama presidency, as an emergency measure to jump-start the economy, with the support of most of the business establishment--was heavily weighted in this direction.

A little over one-third of the $787 billion total in the largest stimulus law in history was earmarked for tax breaks for individuals and corporations. And as of 2010, the White House Council of Economic Advisers reported that almost half of the money actually spent under the stimulus law to that point went to tax breaks.

A year later, the council estimated that each job created under the stimulus law cost taxpayers between $185,000 and $278,000, more than if the money had been spent directly on putting people to work by bringing more teachers into schools or hiring construction workers to work on infrastructure projects.

All the evidence to predict that tax cuts don't result in job growth was already available in 2009. To take one example, in the early 1990s, Republicans made the same claims that Mitt Romney is making today--that raising taxes on the rich strangles job growth--against Bill Clinton's proposal for modest tax increases. In the years after Clinton's tax increase, job growth in small businesses increased more than two times faster than after George W. Bush's tax cuts in the 2000s.

There's no definitive correlation between tax cuts and job growth--because many more economic factors are at play.

In fact, real corporate tax rates have been falling in the U.S. for decades. Though the nominal tax rate on businesses is 35 percent, corporations enjoy so many exemptions, deductions and loopholes that they pay far less--and often enough, nothing at all. Thus, General Electric, one of the largest corporations in the world, paid an average effective tax rate of 14 percent between 2001 and 2010, according to a feature on taxes in Mother Jones magazine.

At the same time, the tax burden has shifted more and more onto working people. Income taxes have fallen modestly for the brackets in the middle of the income ladder, but a good part of the difference has been made up by various regressive taxes, which disproportionately hit working people.

The payroll tax extracted from your paycheck--if you get one--is one example: The tax is capped at just over $100,000 in annual income--meaning the rich pay substantially less as a percentage of their income as, say, an "associate" at Wal-Mart or an employee at an auto parts factory. Thus, payroll taxes have dramatically increased as a share of government revenues.

When it comes to sales taxes, also regressive, no politician ever seems to want to cut them. But they duel with one another to bestow still lower tax rates on corporations.

This is the first way to understand the strange but true fact--that Warren Buffett's secretary, because of regressive taxes like payroll and sales taxes, pays a far higher percentage of her income to governments at all levels than her boss.

THOUGH TAX cuts have been an abysmal failure at creating jobs, they have served another purpose perfectly--creating the fiscal train wreck that has been the justification for deep cuts in an already threadbare social safety net.

The history of the last three decades makes a mockery of Mitt Romney's claims to be more responsible about balancing the government's budget. Ronald Reagan, for example, pledged to balance the budget even as he cut taxes and doubled defense spending. It didn't work out, to no one's surprise--and federal deficits ballooned. Later, Reagan's budget director David Stockman admitted that, despite assurances to the contrary, he knew the budget would produce deficits, but he and his fellow Republicans figured this would compel Congress to cut spending on social programs.

Likewise, George W. Bush insisted that not one, but two huge tax cut packages were needed to spur the economy and job growth--even while the U.S. was fighting expensive new wars in Afghanistan and Iraq. The pile of debt just grew and grew.

Given this history, it's ludicrous for Republicans to claim to be the party of fiscal conservatism. But the Democratic Party can't attack their record of failure--either on the deficit or job creation--because they don't have an alternative. On the contrary, they have helped preside over the shift of the tax burden from the rich to the poor, and from corporations to the rest of us.

Socialists have a simple answer to the favorite question of politicians during debates at election time: How will you pay for it? Our answer is this: Tax the rich.

But within mainstream politics, any proposal of the sort--however modest, and even those which aren't about raising taxes on the rich, but merely not reducing them--is invariably met with the charge of "class warfare." The leaders of the Democratic Party, who are every bit as dependent on donations from corporations and Wall Street as the Republicans, are keen to avoid this charge.

And so the real class warfare continues--the one-sided war of the 1 percent against the 99 percent.

Mitt Romney's program of enriching Corporate America in the name of "helping 100 percent of Americans" is nauseating. But Barack Obama doesn't offer an alternative. He and the Democratic Party accept all the same premises as Republicans about government economic policy--austerity, tax cuts for business and the rich, support for American business above all else.

It will take a mobilization outside of Washington, fighting for completely different priorities, to do something about the jobs crisis in this country.

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