Job Creation by the Wealthy Mostly a Myth
We hear this conservative mantra continually: “We must give tax breaks to the wealthy so they can create more jobs because the rich are the job creators.” Even now, as Minnesota works toward a balanced budget solution—where many agree that revenue is needed—conservatives are holding firm to their policy that “higher taxes will stifle economic growth.”
There is only one thing wrong with this premise and theory. It is not true! Broadly providing tax breaks to high-income earners simply because conservative policy says the rich will turn around and create jobs with the extra revenue has been proven to be false economics many times over.
So why keep insisting these policies are valid? It gives conservatives cover in avoiding the charge that they are merely attempting to make the rich richer. It also permits them to focus on deficit reduction through smaller government, concentrating more public services to fewer people. It excuses them from having to find a revenue solution to fund the broad public services that have made Minnesota a great state.
Granted, some targeted tax credits and tax breaks do stimulate growth. But they aren’t just blindly given to the wealthiest. Policymakers provide these tax incentives for specific job creation, research or innovation based on evidence or economic reasoning that they will strengthen the economy. Yes, some rich people receive the benefits but many go to middle and working-class Americans.
There is no correlation, however, in economic growth and blindly lowering taxes for the rich. In fact, some economists have found the opposite to be true.
Let’s take a national look. Since 1945, the federal deficit increased 4.2 percent under progressive administrations and 36.4 percent under conservative presidents, according to the Congressional Budget Office.
Even more relevant is the fact that these deficit increases coincided with conservative leaders who reduced taxes—most notably Reagan (11.2 and 5.9 percent deficit increases in his two terms); George H. W. Bush (6.5 percent); and George W. Bush (9 and 10.7 percent).
While it may be argued this is not necessarily related to “job creation,” it is related to increases in GDP (debt/GDP ratio) or relative economic robustness. These presidents cut taxes and increased debt but the economy did not grow accordingly. In short, as with historical “trickle down” strategies, it failed.
Minnesotans saw the same deflated numbers in economic growth under Pawlenty’s “no new tax” era.
- Minnesota ranks 32nd in percentage growth in employment (Jan. 2002 to Nov. 2010)
- Minnesota ranks 36th in the percentage growth in per capita personal income (2002 to 2009)
- Minnesota ranks 42nd in the percentage growth in median household income (2002 to 2009)
Minnesota can’t keep coasting on the foresight of past generations. We must have new investments in education, health care and infrastructure.
Moving back to the wider economic perspective on tax cuts, University of Michigan professor and Harvard Ph.D. Joel Slemrod has noted that judging by the political scene in Washington, one would think that low taxes were the main source of economic growth in the United States and around the world…even most Democrats dare not demand that President Bush’s tax cuts be rescinded…but there is no compelling evidence that high taxes impede economic growth.
According to Slemrod’s findings:
“there is no supportive evidence for the claim that low taxes guarantee prosperity. In fact, if you just plot out the points (internationally), you will find a clear, positive correlation between high tax rates and prosperity, and that is because developed countries are the ones with the high tax ratios.”
The premise and the promise that giving substantial tax breaks to the very wealthy will stimulate the economy and “create new jobs” simply has no basis in fact or reality. What it has done, factually is increase deficits, like the $5 billion hole Minnesota is currently in and series budget gaps it has had to close under Pawlenty’s no new tax policy.
This further confirms the failure of trickledown economics and it has made the already wealthy, wealthier both in Minnesota and nationwide. While, “no new taxes” makes for snappy sound bites in conservative news conferences, it’s bad economic policy when it comes to creating new jobs, educating Minnesota’s students, providing health care, and building roads and infrastructure.