Saturday, December 4, 2010

Quick post on job creation and tax cuts for the rich

It is incredibly frustrating that everybody seems to accept, at face value, the idea that tax cuts for those earning over $250,000 per year will cause some job creation. Sure, politicians argue over the efficiency with which those dollars, borrowed from China, will create jobs. Sure, politicians frequently point out that poor families will likely spend 100% of any tax benefits on the precise items that spur demand for jobs. But the core of the Republican argument -- that letting the ultra-wealthy keep more of the dollars they earn will cause them to create massive employment for others -- is just false.

Let's start with a basic truth: The current tax rate on the money spent creating jobs is zero. Not 35% or 33% or 25%, but ZERO. Just for fun, lets use an example that elicits word-play: Steve Jobs. Steve runs Apple computers. Now lets imagine some scenarios. First scenario: Steve's tax rate rises dramatically on January 1. Heck, since we're just illustrating a point, lets make it rise to Eisenhower-like levels, maybe 90%. Now imagine Apple is sitting on a $2 billion pile of cash and wants to know whether they should re-invest it (like by hiring employees and building things) or take it out as profit. If they do nothing, the profit gets taxed at the corporate level, so that isn't a likely action. If they say "screw it, It is my money" and take it out as bonuses, salaries and incentive payments, they end up having that money decimated (literally, reduced by a power of ten). So the $2 billion they had in Apple goes $200 million to the management or stockholders, and the other $1.8 billion goes to pay down the national debt.

If you are trying to remain successful, it would be crazy to take such a deal To give up $2.0 billion in capital that could grow the company and receive in exchange $200 million. Nobody rational would take this deal. Instead, they would look at the situation and say "If I choose to cash out, I get ten cents on the dollar. If I use the money to grow the business, I can deduct those costs, so I end up with the full $2 billion to hire people, build data centers, construct devices, and otherwise make my business grow. See how raising the tax rate creates jobs?

Now imagine that this high-tax scenerio is replaced with a law tax sceario where the top rate for the wealthy is 10%. Looking at the same question of "do we invest $2 billion in growth, or just take it and keep it ourselves", the answer is as predicable as it is an indictment of our lax attitude toward fact-checking basic assumptions: If the top rate were dropped to 10%, Steve Jobs would look at the $2 billion and see that he can pocket $1.8 billion after tax of $200 million. He may consider whether to reinvest his $2 billion in the company, but he doesn't face the tough choice of having to pay significant taxes when he takes money out of the job creating company -- in his case, Apple computer.

Once he pays a $200 million tax bill that frees the $1.8 billion to use as he pleases, will he create jobs with that money? First off, people don't want to pay taxes on money they are just going to use to reinvest in other business, and normally find a way to get the full amount over tax free (as by a merger or similar move). No, even when low rates create strong incentives to pull profits off the table, rather than reinvest them in job creation, those who want to reinvest will do so for the smaller, but still important benefits of the zero tax rate on invested money.

In the interest of completeness, even where it runs counter to my point, I note that personal assistants, maids, nannys, limo drivers, and others who provide services for the personal (and not professional) needs of the ultra-wealthy may see some job benefits. But it is disingenuous to say that the creation of jobs to cater to the personal needs of the uber-rich somehow counts as the kind of general economic recovery job growth that this nation needs. Really, a tax-reduction-stimulus plan primarily aimed to get wealthy limo drivers? Kind of off base.

We need instead to focus on the real. The real is that poor people don't argue over whether they should hedge their foodstamps against inflation: They spend them. The unemployed don't balance the benefits of investing in the oil and gas sector against the textiles sector -- they balance their gas bill against their need to clothe their families. And all of those dollars get spent.

If we want to directly incentivize job creation, we need to focus on that which creates jobs -- consumers wanting things.

I hope I'm wrong, because if it really is this simple, it means the Democrats are about to sign over the keys to the kingdom to pepole who will plunder it and leave it worse for the experience. Any economists ready to clarify?

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