Sid Eschenbach

The Myth that “Raising Taxes Kills Jobs”
or
GNP = CS + BI + GS + TE

With little time left in this Congressional session, legislative scheduling should be focused on these critical priorities. While there are other items that might ultimately be worthy of the Senate’s attention, we cannot agree to prioritize any matters above the critical issues of funding the government and preventing a job-killing tax hike.”

So the Republicans again assert one of the central myths of Chicago school economics in the letter sent to Majority Leader Reid from the entire Republican caucus… that raising taxes kills jobs. This lie, this unfounded fabrication, this straw man specifically constructed in order to give greed a veneer of respectability (to not say virtue) is at the heart of modern — and current American — national economic failure.

Given the ease with which it can be disproven both empirically and theoretically, one wonders about the real agenda of the Democratic party, a party that has since the time of FDR understood that a system of strong progressive taxation is in the best interests of the nation… but a party that has thus far chosen not to contest the claim.

Empirically, the evidence is clear: there is not now nor has there ever been, since personal income taxes were instituted in 1913, any real causal relationship between low tax rates and job-creating prosperit — or the alleged and corollary relationship between high tax rates and unemployment.

A statistical analysis of empirical realities (historical tax rates vs. historical unemployment rates) shows that, to the degree a causal relationship exists, employment and general prosperity are more directly related to higher taxation, not lower.

Most important, the past 97 years have given us many real examples of all possible combinations of tax and unemployment rates: unemployment has been high under both low and high tax regimes, just as it has been low under both high and low tax regimes. And there is either no emperical relationship between them at all, or the relationship is so weak as to be easily overcome by other, stronger factors. In either case, the fact remains that there is no empirical, historical proof — over nearly a century of taxation — that “high taxes kill jobs.”

Turning from reality to the world of economic theory, the “high taxes kill jobs” narrative only holds true under the most excessive cases of both government incompetence and extremely high tax rates, and neither of those is the case at this time. Thus, a solid, mathematical argument cannot be made, so the argument is sold to a gullible and vain public with variations on the theme of “You can spend your money more wisely than the Government.” This is just another prop to the insulting Republican trope of inept government: the oft used “Hello, I’m from the government and I’m here to help!” joke. Moreover, while this general argument that private spending is somehow more “efficient” than government spending has never been true, it is especially not true in today’s import dominated economy — as we shall see.

In traditional capitalist theory, when economists speak of “stimulating” an economy (usually with the goal of lowering unemployment), what they are trying to do (in their own terms) is to “increase aggregate demand.” This is done by adding money to the system. Theory and reality are at this point symmetrical: people always spend more when they have more. So the idea is to somehow get more money into their pockets, their hands, their stores, banks, and businesses.

There are really only two main ways to increase aggregate demand: economically, by somehow “juicing the pot,” or using the entrepreneurial approach of creating a new demand that drives new and greater spending. The second, which is what happened under Clinton during the creation of the IT industry, is beyond the reach of economics, as no one yet has figured out a way to create at will transformative technological revolutions. For practicing economists, therefore, the tools available are the traditional ones of fiscal and monetary policy. And the use of either of these does indeed have an impact on jobs.

Using monetary policy, the central bank lowers interest rates in order to stimulate the economy, as lower rates generally lead to increased bank lending. This is the most direct and usually fastest way to create and circulate new money. The Fed has, of course, ridden this horse until it can run no more, reducing interest rates to near 0%.

Fiscal policy, on the other hand, refers to stimulating via either increased government (deficit) spending, or lowering tax rates, which is where theory goes off the rails in all but the most extreme cases (of very high national rates of taxation as mentioned above). This was the vehicle of both choice and necessity for the Obama administration as it tried to fill the huge spending shortfall created by massive deflation in the real estate and other asset markets — an effort to support GDP through government deficit spending in the absence of consumer or business spending.

So how does tax policy relate to jobs? Remembering that the goal is to “increase aggregate demand” — and understanding that the only way to do that through economic policy (as opposed to “new industry policy”) is to increase the amount of capital in circulation — the question is: how does cutting taxes increase the total amount of money in the economy. And why does paying taxes decrease the total amount of money in the economy?

By definition, as the total amount of money in the economy is not increased nor decreased under either scenario — unlike the other policies that surely do stimulate (via creation of new money through public or private debt) — neither raising nor lowering taxes can be considered at all “simulative.” Neither can have any real impact on jobs, which, not surprisingly, is the precise case shown empirically in the historical record. Again, there is no historical relationship between tax cuts (or hikes) and prosperity or employment.

Possibly the most direct way to prove that higher taxes don’t kill jobs, however, is by using the mathematics of economists themselves. The Gross Domestic Product (GDP) is used to measure the total value of goods and services produced by a nation in a year (in other words, aggregate demand). It is calculated using the following simple formula: GNP = CS + BI + GS + TE, where CS is Consumer Spending, BI is Business Investment, GS is Government Spending, and TE equals total exports. By assigning numbers to these values, the lie is easily shown.

Suppose the GNP = $100, and it is composed of CS=$55, BI=$20, GS=15, and TE=10. That means our formula would read $100=$55+$20+$15+$10. Now let’s say that the government cuts taxes by $5. The formula would then read: $100=$60+$20+$10+$10. Consumer spending goes up $5, government spending goes down $5, and all else being equal, there is no increase in aggregate demand. While simplistic, it remains true. Absent the creation of new funds or new industries, aggregate demand is totally unaffected by all but the most extreme cases of tax policy.

Actually, to a small degree, both a theoretical and an empirical case can be made that given the current economic conditions in the U.S., moderate increases in taxation would be more simulative than tax cuts because of the destination of the spending. Consumers are currently spending approximately 40% of their total after tax incomes on imported items — from imported fuel and cars, to flat screen TV’s and smart phones — and of that amount, possibly 50% (or approximately $1.2 trillion dollars) is repatriated to the foreign suppliers. This reduces real GDP by the same amount, which actually decreases aggregate demand as it makes the nation poorer.

The government, on the other hand, only spends around 5% of its money overseas. That means, in terms of the real GDP figures, that government is a more productive and efficient spender than the consumer in this particular case, once again prooving that raising taxes does not kill jobs, but in the particular case of an import laden nation, actually saves them .

In order for the $100 of aggregate demand (GDP) to increase, any of the following must occur: a new industry is created that spurs general investment and spending (certainly out of the reach of policy makers); the government deficit spends (fiscal stimulus policy, GS goes up),;or business and consumers deficit spend (monetary stimulus policy, CS and BI go up)… or a new trade policy intervenes to decrease imports and increase exports (TE goes up). There are no other ways. Absent new debt, new industries or more advantageous trade policies, economies can only grow at demographically driven rates. Transferring the same amount of money (taxes) between government and consumers changes nothing in terms of jobs; they are neither created nor lost.

Until this point is driven home to the American people by an engaged President, neither a new trade policy nor the desperately needed tax hikes on the wealthy needed to help balance the federal budget will be either understood or accepted by the electorate. If that happens, and given the current political mood, social, educational and other vital programs will be needlessly cut… to America’s great loss. Only by aggressively smashing the myths like “High taxes kill jobs” will the road to better policies be opened. Whether any of this happens depends directly on President Obama. He must make the arguments, and he must drive them home. No one else can do it.

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