Respectfully submitted by Lawrence Rafferty (rafflaw)- Guest Blogger
We have heard for years now that the wealthy and corporations need their tax cuts because without them jobs will not be created and the economy could fall back into recession. I guess I first heard of this concept during the Reagan years with the so-called “trickle down” economics. The claim that economic benefits and improvements trickle down from the very wealthy to the middle class and the poor was one that helped ride Reagan into office and continues to be claimed by some as the way out of recession. Indeed, the Republicans, since the George W. Bush administration have been insistent that the tax cuts for the wealthy are the key to promote increased employment for the country.
It is time that we look deeper into the claim that lowering taxes for the wealthy and for corporations will actually increase employment and separate the truth from fiction. “Based on IRS figures, the richest 1% nearly tripled its share of America’s after-tax income from 1980 to 2006. That’s an extra trillion dollars a year. Then, in the first year after the 2008 recession, they took 93% of all the new income. Wealth is even more skewed. The richest 10% own 83% of financial wealth, which they’ve skillfully arranged to be taxed at just 15%, ostensibly because they pump that money back into job-creating ventures.” Common Dreams
If I read those numbers correctly, the richest 1% continued to increase their wealth during the first year after the start of the recession while the middle class and the poor took significant hits in employment and income. Basically, if the Right’s call to continue the Bush tax cuts and to cut corporate taxation in order to increase employment and wealth for all is to believed, would we not have already fully recovered from the recession since the tax cuts have been continued to this date and the effective corporate taxes are far below the actual corporate tax rate? Just what did the Bush tax cuts do for President Bush’s record in creating jobs?
“The current President Bush, once taking account how long he’s been in office, shows the worst track record for job creation since the government began keeping records.” Wall Street Journal The Wall Street Journal wrote those words just as President Bush was leaving office and they compared all prior President’s records at job creation during their terms. It surprised me that even the much maligned Jimmy Carter administration had a far better record in job creation than President Bush, according to that same Wall Street Journal article. With that recent record of poor job creation, why would anyone believe that reducing taxes on the wealthy would create a bonanza of new jobs?
We have also heard repeatedly that the economy won’t grow jobs because corporations are taxed too much. This refrain is one that baffles me. Especially since I and others have written in the past of the many large United States companies that have paid little or no effective Federal taxes in recent years.
“Many corporate leaders have noted that other OECD countries have lowered their corporate tax rates in recent years, but fail to mention that these countries have also closed corporate tax loopholes while the U.S. has expanded them. As a result, the U.S. collects less corporate taxes as a share of GDP than all but one of the 26 OECD countries for which data are available.” Citizens for Tax Justice
These same corporations make Billions and pay a lower effective tax rate than the poor of this country. “Corporations even pay less than low-wage American workers. On their 2011 profits of $1.97 trillion, corporations paid $181 billion in federal income taxes (9%) and $40 billion in state income taxes (2%), for a total income tax burden of 11%. The poorest 20% of American citizens pay 17.4% in federal, state, and local taxes.” Common Dreams
The numbers tell us that it is not the wealthy and big corporations that create jobs, but the middle class. According to that same Common Dreams article linked above, “A recent study found that less than 1 percent of all entrepreneurs came from very rich or very poor backgrounds. They come from the middle class. That deserves repeating. Entrepreneurs come from the middle class. Not surprisingly, then, since the middle class has been depleted by the steady accumulation of wealth at the top, the number of entrepreneurs per capita has decreased 53% since 1977, and the number of self-employed Americans has decreased 20% since 1991.”
If the numbers tells us that jobs are not being created when the tax cuts for the wealthy and for large corporations are continued or even increased as has been suggested by the Right, then why should we believe those calls for continued lower taxes on the wealthy? What do you think is the truth and what ideas do you have to increase employment? And before I forget, Go Bears!
Additional Sources: The Taxonomist
Raf – you are wasting your time trying to get Bron to state facts. He feels it in his gut therefore it is true, more true than any fact could ever hope to be.
Here is a chart showing income growth by quintile since the Reagan devolution:
http://www.advisorperspectives.com/dshort/updates/Household-Income-Distribution.php
Here are a bunch of charts showing not just this but also how huge gains in productivity have not been reflected in wage gains.:
http://www.motherjones.com/politics/2011/06/speedup-americans-working-harder-charts
And here are two facts showing whre a lot of that extra money is going:
News Item (1980): Average CEO is paid 42 times as much as the average worker.
News Item (2012): Average CEO is paid 380 times as much as the average worker.
I think we should eat the rich.
Tony, the unwashed masses forgot about something called the Law of Unintended Consequences. Adding insult to injury, Republicans found a way to blame all those lost jobs on “welfare queens” driving around in their Cadillacs.
@rafflaw: Just to agree with you, I have started six businesses, including a partnership, four LLCs, and a regular C Corporation. I spent less than $1000 forming each of them. Heck, now you can buy Internet kits, or find sites that do the work for you pretty inexpensively. I am not a lawyer either, but I have not found the law or the IRS regulations that hard to parse in the instructions and requirements for forming a business.
I also think, that by the time a business gets big enough to have to worry about legal complexity, they are big enough to afford attorneys skilled in that area.
Tony, excellent point. Case in point. When the Reagan administration took the politically popular course of getting rid of tax breaks for corporate yachts, corporate jets and luxury cars, people lost jobs by the thousands. I remember reading in one of the trade journals that Wichita lost something like 15,000 jobs when Beechcraft had to shut down the assembly line for their corporate cabin class jets. On the Gulf Coast, several shipyards laid off a lot of people. All because big corporations no longer had a tax incentive for buying new jets, yachts and fancy cars. The price of used cabin class airplanes suddenly went up because big corporations started buying used airplanes instead of new ones. Of course, used airplanes are already built and no new workers are required.
Well put Tony C.
@Raff: Bettykath is saying something I have said repeatedly.
Until the end of the fiscal year arrives for a corporation, “excess revenue” is not considered “income” by the government. Throughout the fiscal year, any excess revenue can be reinvested in the corporation, and such reinvestment is written off as business expenses, which means there is an effective tax rate of ZERO PERCENT.
Reinvestment can be in R&D, in replaced or repaired equipment, in advertising, in opening new outlets or factories, in a greater sales effort that hires new people, in promotions for new products or services, in developing better software. Even in buying community “goodwill” by sponsoring charitable events, scholarships, or aid for the unfortunate.
When the end of the fiscal year arrives, however, excess revenue becomes “income” and taxes are due. If corporate income taxes are HIGH, they have to write a big check to the government with little to show their investors for that check. So corporations have an incentive to please investors by spending the “excess revenue” on building up the business, even though that carries some risk.
If corporate income taxes are LOW, and specifically lower than the risk of reinvestment, the corporations are (statistically) better off realizing the excess revenue as income, paying the tax, and not engaging in the risk of expansion. That is what we see now, with the 11% tax rate you quote.
What creates jobs is HIGHER corporate income taxes. No CEO in his right mind expands his business with after tax income, and any business with more than a million a year in revenue can financially engineer (using loans and other instruments) their monetary stream to divert 100% of excess revenue into growth (in fact, this is what investors expect of newly formed companies and most IPOs, zero income until they have plateaued in growth).
Republicans are telling a Big Lie. The rich spend a much tinier percent of their income than the bottom 99%, and they invest a very small percentage of it in new ventures. The majority of wealthy income is used to purchase long-established income streams (shares of stocks), and that does not produce any new jobs at all.
That brings up an ancillary point: The point of raising corporate income taxes does NOT have to be to increase government income. The point can be, entirely, to push corporations into reinvestment in order to AVOID those higher income taxes, and that means the economy could do better even if the government revenue from corporate income tax declined.
The point is not for the government to make more money (and this is why the Laffer Curve is immaterial), the point is to push more corporate money back into the economy where it WILL create jobs.
I got some of that trickle down for our business. It was yellow and warm. But Ronnie Raygun tried to convince me it was just raining.
Who runs and owns this country? The very rich of course. There the ones calling the shots and the ones telling congress what to do. Congress and president are beholden if they ever want to run for office.
Bron,
It would be informative to tell us the specific regulations that made it more difficult to start your business. I have started businesses and the only thing I had to deal with was taxes. Now, my businesses were law practices, so maybe yours has different demands.
Bron,
The Republican Congress did not balance the budget. They fought Clinton tooth and nail to try to stop his policies and tax increase.
Clinton capped executive salaries which created the stock options. Clinton was also the beneficiary of the internet revolution and the republican congress which balanced the budget.
Isnt congress the one with the purse strings?
After World War II, America was the only viable economy left standing.
If colorations paid their workers fairly, that is, wages reflecting their contribution to the bottom line and in reasonable relation to corporate CEOs, we would all better off. More consumption, more jobs. This simple fact was recognized by that great Communist–Henry Ford when he explained his decision to pay his workers a good wage. “they’ll buy my cars”.
rafflaw:
“Not surprisingly, then, since the middle class has been depleted by the steady accumulation of wealth at the top, the number of entrepreneurs per capita has decreased 53% since 1977, and the number of self-employed Americans has decreased 20% since 1991.””
The accumulation of wealth at the top assumes that wealth creation is a zero sum enterprise, it is not. Wealth is created by developing new technologies and new processes, in other words by ideas. Wealth is truly created from nothing [if one believes that thoughts are not material in nature].
Your article assumes a static pie, but the evidence of the 20th century shows that is an incorrect assumption. With every new technology; the airplane, the computer, the automobile, the amount of wealth in the world has increased and has raised the standard of living. There is no doubt of this simple fact, it is easily verifiable.
Furthermore, the wealth created is either consumed or invested. Since the very rich consume a small fraction of their actual wealth the rest is invested in stocks, real-estate, gold, silver, diamonds, bonds, works of art, old cars, etc. The money is not put under a mattress it is put to work. Each dollar is a soldier working for the owner of that dollar. Where do you think the entrepreneur gets the money to start a venture? It is from the savings and investments of the rich.
If the number of entrepreneurs is decreasing the questions to ask yourself are why the rich arent investing their money in new ventures and why arent people willing to take risks at the same rate they were in the past?
As a small business person I can answer at least one of those questions and maybe both.
The rich are probably more worried about holding on to their money than using it for venture capital. They make better returns in the stock market or real estate.
To start a business there are a good deal of regulations to comply with for one, then there are the taxes. When I first started it seemed like everyone but me was in my pocket for something, a fee for this or that, an extra tax to pay, a paper that needed to be filed with the state and local governments and with the federal government. If you own a retail establishment you have to collect sales tax. And you need to hire an accountant to do your taxes and payroll and have a lawyer and maybe a business consultant to help steer you through all of the red tape. Not to mention environmental regulations if you want to start an automotive repair shop or a dry-cleaners. And I can only guess at the amount of regulations to start an oil drilling company or a mine or quarry operation.
I may be wrong but I really dont think the rich are causing the down turn in our economy.
If the politicians really cared about the middle class they would cut everyone’s taxes to about 10-15% of what they made to include all taxes both state and federal. And they would pass a balanced budget amendment and reduce spending to 1995 levels.
Bottom line though is that money taken by the government is money not used to created jobs or it is so grossly inefficient at creating jobs it is all but useless.
Mike S.,
You are right that the real job growth comes from small business.
Frankly,
I am old enough to remember the 50’s and your point about reduced regulation is right on.
Bettykath,
We wouldn’t want to slow that rush to feudalism, would we? 🙂
Increase the tax rate on corporations and the wealthiest and close the loopholes.
With a low tax rate, it makes sense to keep/distribute as much profit as possible. With a high tax rate it makes sense to invest as much as possible of extra pre-tax income in the business or create a new one where it can be written off as a capital investment. This leaves less profit to be distributed (slowing the wealth gap) and to be taxed at the higher rate but sets things up for additional income and profit in the future. The investors would be getting less income to be taxed at the higher rate but they would have a sort of savings plan in the future profits of the improved company.
There is also the chicken and egg problem of companies not wanting to produce that which the consumers aren’t buying b/c they don’t have the funds to do so. And the lack of jobs that prevent the consumers from having extra funds to buy those goods. Back to the importance of the middle class which is getting smaller.
The above two paragraphs are connected. Wages and benefits are legitimate tax deductions. So companies can hire more people, reduce their highly taxed profit by investing it in workers, provide more people with enough money to buy the goods they produce, and the economy improves all around.
Of course, it would slow the path to a feudal society.
anyone old enough to have been aware since the 50’s can tell you this in much simpler terms. We had higher taxes and more regulation from the time of FDR till Reagan. During that time we had an expanding economy, more jobs, better pay/compensation and less income inequality. From Reagan till today we have had lower taxes, particularly since the W disaster and increasingly LESS regulation. This has been a period of more unemployment, no real income growth, worse compensation, little or no real economic growth and run away economic inequality. The only break in that run was during the Clinton years when there was a tax increase that Republicans predicted would lead to economic catastrophe (anyone else remember getting those pictures of road signs with “Clinton” arrow one way ad “Prosperity” arrow the other?).
Despite demonstrable results proving the GOP economic policies are a recipe for disaster they keep pushing them and the media is kind enough not to point out the obvious.
Good topic Larry. The game being played with the “job creator” meme is that it is the work of ” entrepeneurs”, however, investment game players like Romney are really what they’re talking about. Jobs are created by small businessmen and by people who develop product innovation. Usually the “real” job creators aren’t listed on a stock exchange. The reason being that those businesses can concentrate on developing their business, rather than continually being forced to ever increase profits to please finicky traders.
Well said Nal. And thanks!
Great article raff.
If one wants to create more jobs producing widgets, there has to be more demand for widgets. During an economic recession, people cut back on buying widgets. Put more money in consumer’s pockets to create more demand. Putting more money in the pockets of the wealthy just means more money in offshore accounts.