‘Trickle Down’ Folly : Cutting Taxes Doesn’t Create Jobs

The “trickle down” theory: how it works.

How NOT to create jobs:
Cut business taxes and lower wages?

Money does not trickle down in a capitalist economy — it flows upward, and that has always been true.

By Ted McLaughlin / The Rag Blog / February 3, 2010

For years now, the corporate-owned Republicans have been telling us that the way to create more jobs in America is to cut business and corporate taxes and lower wages for workers. They would like to do away with the minimum wage completely, which would put downward pressure on all wages (except for corporate executives).

Even President Obama has recently jumped on this dubious bandwagon by recommending business tax cuts as a part of his jobs creation program. On the surface, this sounds like it might work. After all, if business owners got to keep more money from reduced taxes, they would be able to afford to hire more workers — right?

The real question is whether a businessman being able to afford more workers would actually translate into that businessman hiring more workers. I submit it would not. Answer this question — is a person in business to create new jobs or to make as much profit as possible?

Any sentient being knows the answer to that question. Nobody goes into business to create jobs. Most business owners work very hard, and they do it to make as much profit as possible so they can make life better for themselves and their families (and there’s nothing wrong with that as long as it’s done legally).

So what would happen to the extra money a business owner would get to keep from lower taxes or lower wages? Unless he/she chose to donate it to some charity (and a few might), it would go in the owner’s bank account to maximize profits (and the same thing would happen in a corporation). This is understandable, but it does nothing to create new jobs.

There are a couple of ways to cut taxes and stimulate job growth, but they are cumbersome and expensive and nobody is proposing them. One way would be to legally tie a business tax cut to the creation of new jobs at that business ($X in cuts=X number of new jobs). The problem with this approach is that the tax cut would have to equal or exceed the actual salaries of the new jobs in order to create more than a miniscule amount of jobs.

That would be a very expensive solution. It would probably be cheaper for the government to hire workers directly for a depression/recession program like Roosevelt’s CCC or WPA.

So if a business tax cut will not work, what kind of tax cut will work? A consumer tax cut like lowering sales taxes or income taxes (for those making less than $100,000).

Republicans want us to think the American economy works in a “trickle down” manner. In other words, if you give the rich businesses enough money some of it will trickle down to workers. That is total nonsense. The economy has never worked that way. Money does not trickle down in a capitalist economy — it flows upward, and that has always been true.

Just look at our history. The best times for our economy were when consumers had money to spend. Take the 1950’s for example. Consumers had it good because it was a time of educational achievement (thanks to the GI Bill) and union expansion. This gave consumers more money to spend, and because of that businesses (both large and small) thrived as that money flowed upward.

There is only one reason for a business owner to hire more workers (create jobs), and that is because he/she needs more workers to handle an increase in demand for that business’s goods or services. That increased demand can only happen when consumers have money to spend.

This same argument is true whether we are talking about tax cuts or lower wages. Lower wages would let the business owner keep more of his money, but it would also shrink the amount of money consumers have to spend. And in the long run, that would hurt both workers and businesses. Instead of costing jobs (as Republicans want us to believe), higher wages actually create jobs as businesses must hire workers to handle increasing demand created by the higher wages.

Cutting business taxes and/or lowering wages is only a short-term solution for a long-term problem. This recession has cost America over 7 million jobs, and this economy will not really start moving again until we recover most or all of those jobs. The only way to do that is to aim the recovery money at workers and consumers — not at businesses.

Cutting business taxes and/or lowering wages will give businesses a little short-term profit, but will not create jobs or help the economy. Cutting taxes for consumers and directing recovery money at workers will not only create jobs and put our economy back on track, it will help business even more in the long-term. It is the only solution.

(A tip of my hat goes to Badtux the Snarky Penguin for his humorous and very astute take on this situation.)

[Rag Blog contributor Ted McLaughlin also posts at jobsanger.]

The Rag Blog

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12 Responses to ‘Trickle Down’ Folly : Cutting Taxes Doesn’t Create Jobs

  1. Sid says:

    There is absolutely no statistically significant relationship between levels of taxation and economic growth since the 1913 to the present. This is a totally fictitious argument created out of whole cloth by the rich who simply wanted to keep more money. They couldn’t just come out and say that in the still relatively egalitarian 70’s, so they created an entire house of cards out of Ayn Rand born fantasies… that high taxation rates discouraged entrepreneurial spirit, the John Galt mantra of’why should I go to work if I don’t get to keep my money’ argument, and under the simple minded sincerity of Reaganomics successfully changed economic theory.

    Greed, however, hadn’t become so acceptable in those innocent days, so they figured out a new line of attack that, incredibly, still has traction: that cutting taxes increases revenues by making everyone work harder and more productive (with it’s running dog companion theory, that raising taxes invariably hurts economies). Total idiocy, but what the heck… it worked. Ronnie made government the enemy and greed a virtue. Unfortunately, even Obama has yet to really see this for the sham that it is and attack it directly. When he does that, when he demonstrates that he understands Econ 101, I’ll have a lot more hope for the country. As it stands, it doesn’t look good…

  2. So what would happen to the extra money a business owner would get to keep from lower taxes or lower wages? Unless he/she chose to donate it to some charity (and a few might), it would go in the owner’s bank account to maximize profits (and the same thing would happen in a corporation). This is understandable, but it does nothing to create new jobs.

    Really? How many jobs have you created Ted, and you Sid? Business owners are constantly doing a sort of ROI calculus. There are always opportunities, but taking advantage of them requires a committment of capital and resources. i.e., “a competitor is leaving the market, I can pick up their product line or their customers, but I need more sales and operations resources.” Tax breaks are just one of many factors that influences the decision the business owner reaches.

    It is simplistic to say the revenue from tax breaks will go to the owners bottom line, nor can you say they will go to create jobs or outsource to other companies. The tax break cost reduction becomes part of the complex calculus of running a business. The less cost and risk the business owner has, the more likely he will be to expand his business. Tax breaks improve the liklihood of business’ deciding to grow or expand. That gentlemen, is Econ 101.

  3. Sid says:

    Extremist: Please demonstrate the inverse relationship claimed between marginal tax rates and GDP growth. After you do that, I’ll reconsider your baseless assertions more carefully. When you fail, please retract them.

    As to jobs, I’ve created thousands and currently have a payroll of about 60. If you’d like to contribute to that cause, it’s due tomorrow. Meanwhile, lets stick to the supposed relationship between taxation and prosperity upon which Ronnie built his castle and for which he is the hero of the rich.

  4. Len Hart says:

    I have been saying this since the administration of R. Reagan PROVED that ‘trickle down’ doesn’t! It’s all GOP focus-group designed bullshit to make insecure gop-heads feel better about being greedy bastards.

  5. Focus groups and GDP statistics? Thats what you guys are basing your positions on? Of course Sid has been spending time designing, engineering, costing, scheduling and drafting the presentation to a Vice-Presidential commission looking for solutions to a local municipal wastewater problem. So I am sure that has given him insight into making a payroll.

    Unless you have had to make a payroll and figure out how to try and make a profit after making the payroll, your just regurgitating left wing talking points. I have put my money and my future on the line and built some businesses. Taxes, fees, insurance, regulations, general economic conditions, all of these things factor into business decision making. You dont consult any freaking GDP statistics or some focus group, or a bunch of whining left wingers who just want shit for free. When uncertainty is high and costs are rising, you tend to be conservative and run in place. When uncertainty is lower and costs are contained, you tend to be more aggresive with growth and expansion. Put that in your focus group.

  6. Sid says:

    Does what you say even make sense to yourself? First, you try and justify your position because you seem to think that you’re the only one who has ever had to invest, risk, meet regulations and make payrolls… as though you’re the only ‘real’ person qualified to have an opinion. You’re wrong about that.

    Second, and far more importantly, this isn’t about your opinion or mine, but economic facts. You know, those things you scoff at like ‘GDP’ and other irrelevant stuff… You appear to believe that if businesses all had their taxes cut that that would somehow create a more prosperous general economic scenario. I asked you to give some proof for that assertion, and instead got more blather about ‘left wingers that want shit for free’. I had hoped you could have done better, although I’m not sure how, as unfortunately for your side of the argument there in fact are no empirical data that back it up.

    Regarding the impact of uncertainty on business, your points are obvious. For that ‘uncertainty’, as in, ‘are we going to survive an economic catastrophe unparalleled since 1929 and at what cost’, you can thank the two tremendously stimulative and productive Bush tax cuts, two unpaid for wars and a huge ($1 trillion over 10 years) and also unfunded Medicare prescription bill, all combined with a government that was convinced that no regulation was good regulation. Worked great. That’s where the uncertainty came from, and you have the nerve to insinuate that trying to fix it is causing ‘uncertainty’? Please. Like the man said, you can have your own opinion, but you don’t get to make up your own facts.

  7. Sid you forced me to reread one of Glen Becks boos “Arguing with Idiots” ūüôā

    I am not “making an argument”. This is my life and I offer you real world experiences. There are millions more small business people like me with the same experiences. Higher taxes means less revenue means less growth. Its not freaking rocket science. Even so, you didnt care for the evidence because it didnt support your storyline.

    You strike me as the typical cocky know-it-all that wants to tell all of us who are doing it, how you think it should be done. You go take your own money and start a business that gives jobs to a couple hundred peopkle and then you might not be so cocky and dismissive of people who do just that everyday.

    Until then, I have to conclude your just running your head about about stuff you read in a book or some blog and give your “facts” the credence they so richly deserve ūüôā

  8. Sid says:

    You say that you aren’t “making an argument”… and then make one! Your argument, FYI, is “Higher taxes means less revenue means less growth”. Do you recognize those words? They’re yours. That’s your argument. And while you’re right that it’s not rocket science, don’t forget that nonetheless it is science… economic science. And science, as opposed to political myths, is based upon facts. Therefore, your opinions, if you want to be taken seriously, need to be based on facts too, not just talking points for what makes you feel good (contributing less of your money to the general welfare).

    Trapped within that science of economics there are lots of inconvenient truths for your side of the argument,like the lack of any statistical correlations between higher taxes and lower prosperity. I know that because I’ve figured them out. I’ve posted them. You could too if you wanted, but you don’t. I also noticed that when Bill Clinton raised taxes the middle class didn’t disappear, it grew. The nation didn’t stumble and crash, it prospered. Inconvenient truths… they’re a bitch.

    You should get out more, take a trip to Europe where rich people pay high taxes and see how poorly everybody lives, verify your theories. See all the street people huddled under the overpasses, the small businesses going bankrupt struggling to pay their taxes, the terrible general health provided by a national health system available to everyone paid for by taxes… and then tell me there’s a direct negative correlation between high taxes and well-being.

    Or maybe a trip to the third world, the place where businesses pay no taxes to speak of… and try and figure out why everybody’s still so miserable. Why there’s no middle class. Answer the question “How can taxes be so low and yet, in spite of my theory, people be so poor? After all, everybody knows that ‘less taxes = more revenue = more growth'”

    You should be able to afford to take these trips, seeing as how as a businessman you’ve been uniquely able to take advantage of those two Bush tax cuts that created such boundless wealth among American entrepreneurs. That is what happened, isn’t it? There is cause and effect, isn’t there? Like you said, if ‘Higher taxes means less revenue means less growth’, the opposite must be true, right? Are we now in that ‘lower taxes means more revenue means more growth’ world brought about inevitably by the Bush tax cuts. Feeling prosperous?

    Getting back to reality, regarding your side of the argument, the one you’re not making, the one I quoted above, I’ve asked you to prove it three times now and all I get are insults and suppositions of things you know nothing about, namely, my life. If that’s all you’ve got, I’m done.

    If you’d like to try and support your argument with facts, I’m all ears.

  9. I suspect Obama is getting very similar advice to that which Sid has shared here. Probably with the same strident assessment of its own correctness and importance. Facts (like mine) cant be allowed to get in the way of the liberal political agenda and a good base rallying storyline about getting even with the evil, rich business owners.

    I suspect a lot of business owners and a lot of out-of-work workers will be expressing their ideas come November about higher taxes, rising federal spending, staggering deficits, and anticorporate / anticapitalist agendas. Perhaps Obama can ask Sid to quote the voters some GDP statistics so their blinders will be lifted and they can finally grasp that raising taxes is really better for workers than lowering taxes. Good luck with that.

  10. Sid says:

    Not surprisingly, like your political brethren you continue not to cite facts but simply spout baseless opinions. After all, who needs facts to support an argument, anyway, when it’s so much more fun to simply make stuff up? Death panels rule!

    For laughs, however, I’ll try once again. Please tell us exactly what higher tax you’re paying as a result of Obama policies. That should be a gimmie as you’ve made the claim, a specific claim about yourself. While you’re at it, which of the Obama policies caused the millions of lost jobs that occurred before he passed a single bill?

    Don’t worry, I don’t really expect an answer. Later.

  11. Anonymous says:

    Supposedly bailing out banks; giving them money to operate with would ‘guarantee’ loans to applicants. That didn’t work, now did it!

    Cutting taxes doesn’t ‘guarantee’ anything other than the corporation or business will have less of a tax obligation.

    Currently corporations spend much time in finding tax loop-holes as it is – why give them more $$ to play with, when there’s NO GUARANTEE they’ll do anything different to improve a damned thing!

  12. Well Sid, pearls before swine is the best I can think of to describe our exchange.

    You go get our your calculator and work on your economic science. If you can find one sucessful businessman that spends more than five seconds thinking about 50 year trends in GDP growth relative to tax rates when trying to decide whether to invest money to grow his business, and I will stand up and salute.

    My mom used to reign me in when i was involved in these kinds of discussions by pointing out “when you wrestle with a pig, you’ll both get dirty, but the pig will like it”. Sid you are not here to debate ideas, you are here just here to fight. I find you annoying. I think your a punk with an overblown appreciation for your own insight and wisdom. (sorry Thorne, I dont give a crap if you censor that)

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