Submitted by Brendan Fischer on December 18, 2010 - 3:44pm
The White House and many Congressional Democrats recently caved to Republicans in a deal extending all of the Bush tax cuts for two years in exchange for a 13-month extension of unemployment benefits. The deal reverses stated opposition by many Democrats to an extension of tax cuts for the top income bracket, with 25% of the savings from the deal going to benefit the richest 1% of Americans. While Democrats who supported the bill claimed to do so begrudgingly, the plan has many avid supporters who justify its lopsided benefits by insisting that tax cuts for the rich and for businesses create jobs and benefit the economy. This is a big myth.
Looking at raw statistics, it is easy to see that there is hardly any correlation between reducing personal income tax rates for the wealthy and employment levels. The marginal tax rate for the wealthiest members of society hovered above 90% for the twenty years between 1944 and 1963, with unemployment during this period as low as 1.2% and a high of 6.8%. From 1965 to 1981, taxes for the upper income bracket were lowered to 70%, with unemployment as low as 3.6% and as high as 7.7%; from 1982 to 1986, the wealthy were taxed at 50%, with unemployment only reaching a low of 7% and a high of 9.7%. Taxes continued dropping through the 1980s and 1990s, with the top tax rate dropping to 31% in 1992, but with very little positive impact on job growth. In 1993, unemployment was at 6.9%, the tax rate for the wealthiest increased to 39.6%, and unemployment actually decreased to 4% by 2000. From 2003 through today, thanks to the Bush tax cuts, the rich have been taxed at 35%, and unemployment is now approaching 10%.
Jobs are Created by Consumer Demand, Not by Increasing the “Supply” of Disposable Income for the RichRepublicans have pushed for extending Bush’s tax cuts on the rich based on the logically appealing premise that “government doesn’t create jobs, private business creates jobs; therefore, if we reduce taxes on businesses and the upper income brackets they will have more to spend on creating jobs.” Many Republican candidates ran on this platform, and recently, “bipartisan” deficit reduction recommendations from both the Bowles-Simpson and Rivkin-Domenici commissions have arguably advocated for reducing taxes for the wealthy and corporations, and increasing taxes on low- and middle- income Americans. Whlie the degree of the cuts depends on whether we look at marginal or average tax rates, and the baseline tax rate used in the assessment, its regressive tax margins appear to rest on the “less taxes on the rich equal more jobs” assumption.)
The idea that wealthy people and corporations create more jobs when paying less in taxes is a claim that has superficial appeal, premised on the idea that, because businesses employ workers, they would employ more workers if they had more money. However, this simple calculus fails to acknowledge that employment is driven by consumer demand, not the amount of money in an executive’s pocket or on a business’ balance sheet. A business or entrepeneur will not use profits to add more workers unless there is consumer or business demand for their product or service.
Continue reading at: http://www.prwatch.org/node/9828