Politicians of both parties seem to take for granted the idea that a tax cut leads to economic growth and more jobs. As it turns out, they are only half right. Tax cuts to the poor and middle class lead to growth and jobs. Tax cut on the wealthy create no new jobs and generate no new economic growth.
One reason for this phenomenon is that poor and middle class people spend more of the extra money produced by a tax cut and save little, if any, of it. By contrast, the upper middle class and wealthy will save most of the additional money, typically burying it in deep holes that have no real impact on job creation except when a burst bubble leads to massive layoffs—in stocks on the secondary market, artwork, collectables, real estate and other non-productive investments. Remember that when you buy a share of IBM or Apple, not one penny goes to the company to expand or develop; the company only collects from selling the initial sale of a stock offering.
To understand the other reason that raising taxes on the wealthy creates jobs and economic growth, compare the spending and saving patterns of all people and the government. Poor folk spend a lot, save a little. Even the most spendthrift of rich folk eventually run out of things to buy and end up burying their money in non-productive assets. But the government spends every dollar we send it—circulating trillions of dollars back into the economy by sending checks to millions of individuals and businesses. That spending grows the economy and creates jobs.
While paying a bit more in taxes than a few years ago thanks to Obamacare taxes and the unwinding of some Bush II tax cuts, the wealthy are still paying much less in taxes than they did in the golden age of the American economy, approximately 1945-1975. Compared to other industrialized democracies since the beginning of the 20th century, the current rich in the United States pay historically low rates and amounts.
Economists have discovered that one beneficial side effect of high tax rates on the wealthy is that it leads to greater equity in income and wealth. When the highest incremental tax rate was 90%, executives had less incentive to pay themselves large salaries and so plowed more of their company’s earnings into R&D and salaries and benefits for other employees. As top individual tax rates declined—from Kennedy to Reagan to Bush II—the salaries of top execs soared, while those of everyone else stagnated or diminished. In the 1960’s, for every dollar the average factory worker made, the average chief executive officer made $42. By the 21st century, the ratio exploded to anywhere from $340 to $540 paid to every CEO for a dollar paid to factory workers, depending on the year. In Europe, by the way, the ratio is a much lower 25 to 1! Thus by raising taxes on the wealthy, we will not only give the government more money to spend on education, healthcare, infrastructure, alternative energy development and the social safety net, we will also encourage large companies to invest more and give more to employees, which will grow the economy and reverse decades of growing wealth inequality.
Donald Trump and Republicans are clamoring for a cut in the corporate tax rate. While the rate is high, with all the loopholes and deductions corporations are paying less now than they did 20, 30 and 40 years ago, and, depending on the survey you see, about the same or a little less than corporations pay in the rest of the developed world. It’s those loopholes we have to look at. Which of them serve a policy end and which merely make it easier for corporations to reduce their taxes? Take the social policy of protecting the environment and transitioning to renewable energy. Our current corporate loopholes and deductions heavily favor oil and gas exploration and use. We would be much better off ending all subsidies to the oil and gas industry and replacing them with greater incentives to develop and use alternative energy and pollution-lowering devices and systems. In the end, whatever the set corporate tax rate and systems of deductions, the real rate corporations pay should rise a little, and certainly not be lowered.
One of the big lies of right-wing economic policy is that Americans pay more in taxes than most other countries of the world. We pay very low taxes when compared to the rest of the developed world. The Tax Foundation found that the total tax burden faced by average wage earners in the United States is 31.7 percent of their pretax earnings, which 24th highest of the 35 countries in the Organization for Economic Cooperation and Development (OECD), far below the 34-country average of 35.9 percent. Maybe that explains why most of the rest of the industrialized countries have universal health care, better kept roads, more extensive mass transit systems, lower-cost higher education and better retirement plans. According to the Tax Policy Center, total U.S. tax revenue—individual and corporate—now equals 26% of gross domestic product, well below the 34% average for developed countries.
If the goal is to transfer wealth from the poor and middle class to the wealthy, than the best tax reform is to lower taxes on the wealthy, like Trump and the Republicans seem to want to do.
If, however, the goal is to create more jobs, improve the economy and invest in our future, we should keep taxes as they are on the poor and much of the middle class and raise taxes on the wealthy.