Deception and Distraction: the fabricated connection between tax rates and job creation

How many false and/or misleading statements can conservative strategists fit into a single sentence.  Let’s give it a shot.

The threat of higher taxes (e.g. the Bush tax cuts being allowed to expire for high earners) creates uncertainty that is keeping the “job creators” from being able to create jobs.

If you object to this sentence as representing the conservative position, raise your hand now… and tap the BACK button on your browser.  Otherwise read on.

So what is false and/or misleading?

1. The expiration of the Bush tax cuts raises the taxes on people earning $300,000 by $1,500./year.  If you earn a cool million (that’s $1,000,000.), your taxes could go up a whopping $22,500.  These tax increases are relatively negligible.  This affects few if any businesses as it generally applies only to individual taxpayers.

2. The only businesses directly affected are those structured as tax pass-through entities -- S-corps, some LLCs, partnerships and sole proprietors.  And in fact, hiring people creates tax deductions that reduce the taxable basis for these companies.  Specifically, hiring people means fewer dollars pass through to the owners.  So hiring new people actually reduces their taxable income (until the new employee is generating revenues and profits in excess of expenses – which means they are making marginal profits for their employers… now there is a problem one wouldn’t want to have).

3. Paying a new employee reduces marginal taxable income.  Raising taxes on marginal income actually creates an incentive to hire.  If the marginal tax rate is 50%, then hiring an employee only costs 50 cents on the dollar as the salary is 100% deductible.  Do I want 50% of the money in cash or 100% of the money in productivity?… hmmmm.

4. There is no such thing as a job creator – with the possible exception of Bangladeshi economist Muhammad Yunus and the Grameen Bank micro credit program.  There are simply businesses that grow and generate jobs as the addition of new positions becomes marginally profitable.  Big business has no interest in creating jobs.  Business aspires to be an “income creator.”  Jobs are an inconvenient bi-product.  That’s the reason so many companies are using business services companies and outsourcing and off-shoring jobs.  

5. The implication that the alleged “job creators” want to create jobs to begin with… but are being prevented from doing so.  Lets look at some big “job creators.”   It is reported that Koch Industries has cut thousands of jobs over the past three years, even as profits have risen, and the Koch brothers net worth has increased by 40%.  Oops.  See #4… Companies don’t want to create jobs.  They do so only reluctantly.

6. In the past 10 years… with the benefit of the Bush tax cuts in place… our economy has created (drumroll please)… -203,000 jobs.  That’s minus, as in negative, less than nil, nada, zip.  In the 1990s, with higher marginal rates and fewer loopholes, ~19 million jobs were created. 

Conclusion?  There is no defined relationship, causality, or even correlation between hiring and tax rates, no matter what the Republican Presidential candidates say.  Who could imagine that one simple sentence could be so deceptive. 

Now don’t get me wrong… allowing the Bush tax cuts to expire/raising taxes is no silver bullet,   What we really require is structural reform.  Tax brackets are really not the issue at all – they are barely part of the conversation -- and that’s the very reason conservatives want to talk about them.  The further they stay from the real issues, the better their prospects look. 

Coming Soon:  How tax rates are being used as a red herring/smoke screen.