After the failure of The Patients Choice Act, President Trump has decided to move his focus toward tax reform. With such a wide division in his party on health care, tax reform seems like a much more doable task. After all, Republicans have, for decades, touted the effects of lower taxes on job growth. But, do lowering taxes have a point of diminishing returns? Is there factual evidence to support their claim that lower taxes create jobs or is it simply dogma?
In order to find the answer to this question, we must turn to an expert in conservative economics. Bruce Bartlett is such a master. Bartlett is the author of Reaganomics: Supply-Side Economics in Action, and helped draft the Kemp-Roth tax bill, which became the basis of the 1981 Reagan tax cut. Despite his loyalty to conservative principles, in his 2009 book, The New American Economy: The Failure of Reaganomics and a New Way Forward, he defended Keynesian economic policies stating that while supply-side economics was appropriate for the 1970s and 1980s, its arguments do not fit contemporary conditions. So, what does that mean?
A Rush to Judgment
Rush Limbaugh once said “No nation has ever taxed itself into prosperity,” but does history agree? I decided to step into my “Wayback” machine and head back to the 1950s to see if he was right. In the 50s, America achieved a level of prosperity like never before. The overall economy grew by 37%, the middle class families had 30% more purchasing power, and despite two short recessions, the average unemployment was 4.9% with a low of 2.7%. If Rush were right, one would conclude the tax rate must have been low, but one would conclude wrong. The tax rate for highest income earners was 91% with a corporate rate of 52%
I began to think; maybe the 50s were an aberration. So, I got back into my Wayback machine and headed forward to the 80s. After the stagnation of the 70s, the people were ready for a change. Enter Ronald Reagan and his team of Supply-side disciples. Reagan said: “You can’t be for big government, big taxes, and big bureaucracy and still be for the little guy.” So, with his magic wand in hand, Reagan began to cut taxes. First in 1981 and then again in 1986 until they were cut to 28% for the top earners and 34% for corporations. It seemed to make sense. And, Reagan’s deep faith in the free market principles was rewarded with a long and strong economic boom. The number of millionaires went from four thousand to more than 35,000. But, for middle- and working-class families who depended on wages for their incomes, it was somewhat better than it had been during the bleak 1970s, but still significantly worse than it had been during the 1950s. And, what about that unemployment rate? Well, it pretty much hovered at around 7% never going below 5.4%. So, maybe Rush and the supply siders were wrong. But, if that’s true, where does this leave President Trump and today’s conservatives who continue to religiously profess that lowering taxes create jobs despite history? And, if lower taxes on the wealthy and corporations have no affect on job creation, what does?
One Size Doesn’t Fit All
There is many factors economists agree influence job creation: Innovation, education, incentives, but the most important factor is the “Velocity of Money.” What exactly is the velocity of money? Let’s say you have a store owner, a cattle rancher, a farmer and $10. The store owner takes the $10 and gives it to the rancher for beef to sell in his store. Then the rancher takes the $10 and gives it to the farmer for grain to feed his cows. Finally, the farmer gives the $10 to the store owner for seeds to grow a new crop. That $10 has the purchasing value of $30. The more hands that $10 touch, the more the need for workers and the more jobs
So, what happens when that $10 is given to corporations and the top 1%? Evidence shows us that corporations take that money and give it to their investors. This is best qualified by the actions of the G. W. Bush in 2004. According to Forbes in 2011, “In 2004 under President George W. Bush, Washington let corporations temporarily bring money from offshore profits at a flat tax rate of around 5.25%. The promise was when that money returned, they would invest in new businesses and jobs would be created. But a few years later, Bush’s own chief economic advisors said there was no evidence that jobs were created as a result.” And as far as the top 1%. Do they buy more things? No, usually they just buy more expensive things. Their kids go to a private schools, and they buy a more expensive car or house. But the amount of labor remains the same.
Rage Against the Machine
High taxes and outsourcing labor to foreign countries has become the excuse by conservatives for the rise in unemployment in the 21st century, but evidence reveals that since 2000, 88% of jobs lost in the US, have been lost to robots and computers, and most of that loss has come at the hands of big corporations. Giving tax breaks to these corporations will only give them more money to invest in replacing human labor with more technology. Back in December, the incoming President boasted he had saved jobs at a Carrier plant in Indiana from leaving to Mexico. Giving Carrier a tax incentive of $7 million dollars was responsible for their change of heart, but shortly after, Carrier announced they were investing that money in technology that would replace great numbers of that very workforce that had been saved.
Elon Musk’s new battery factory in Nevada, when at full capacity, will produce more lithium batteries than were produced in the whole world in 2013, while employing a mere 6000 workers. To put this in perspective, there are over 100 battery factories in China alone, and just one of them employs 5000 workers. And that number is small because they use 9 robots to do the same work as 140 employees. And, when you look at future implications of renewable energy and it’s affects on the traditional power industry, it is safe to say tens of thousands, if not millions of related jobs in those industries will be lost. So, where is the logic that give tax breaks to the traditional energy sectors when technology and innovation is slowly making them obsolete? Wouldn’t it be money better spent to train those people to install solar or maintain wind turbines?
And if the goal of lowering taxes is to increase revenues that translate into more jobs, then why is it that between 2007 and 2009, Wall Street profits swelled by 720%, while unemployment rates doubled. The answer is simple, more automation. As automation increases, the demand for factory workers decreases, while workers with special skills have reached such demand that companies have been forced to look outside the country to fill these positions. Globalization allows them to pick and chose from all over the world, the most qualified workers. You can cry “America first,” but that won’t change reality. We can only compete for jobs with the rest of the world by keeping a step ahead of the rest of the world, and that makes education paramount. President Obama once asked Steve Jobs why he made Apple products in China. His answer was America’s lackluster education system is an obstacle for Apple, which needed 30,000 industrial engineers to support its on-site factory workers. Yet, the Republican Congress and President Trump profess that cutting our federal budget on education and giving the top 1% and corporations big tax cuts is the best solution for creating jobs.
A Randumb Thawt
Although, there appears to be strong argument that lowering taxes on corporate America is an incentive for new investment, that doesn’t necessarily translate into more jobs? Tax reform, as a singular solution will not fix today’s set of employment problems. This is, as Bruce Bartlett has said, a one-size-fits-all economics. The fact of the matter is that over the last 35 years, raising taxes have done more to stimulate growth than tax cuts. But now, even that will not bring new jobs.
What is needed today are not tax breaks, but rather more tax revenue to make an investment in our workers to train them to do the jobs of tomorrow. We can’t expect corporate America to spend a penny of their new found revenue from tax breaks for that. Why would they? Their job is to bring as much value to investors as they can and reduction in labor costs is always a good place to start. Besides, they can find workers from all over the world that are already qualified and globalization allows that person to work from his, or her homeland.We need more revenue and incentives to create jobs that can’t be sent overseas and to train Americans to do those jobs, not just blanket tax cuts. Jobs in infrastructure, education, new energy and healthcare. And, the cost for this can only come from that 720% increase in profits. The middle-class is tapped out. It’s time for our politicians to be honest with the American people and tell many of them their old jobs aren’t coming back. That they need to retrain for those jobs that can’t be outsourced or replaced by robots. But instead, the American workers lay on their couch waiting for their job to return believing in the promise made by the Republican Congress and our President. A promise that can’t be kept.