Tax Cuts, Job Growth and their Mythic Relationship

by R.G. Rich

Do tax cuts for the wealthy create new jobs? In fact, the exact opposite is true, and well illustrated in recent history.

Raising tax rates for the wealthy creates new jobs.

Why? When rates are raised, the value of a tax deduction is increased in real terms. Hiring a new employee or buying a new piece of equipment is a new business expense. At higher tax rates, the wealthy, and businesses small and large, look to offset taxable profits.
When rates are low, there may be little incentive to hire or replace older equipment because taxes are not perceived as a burden. When rates are high, those same increased expenditures provide a bigger economic benefit through tax savings, thereby creating an additional incentive to spend. High tax rates provide an incentive for expansion, in order to shelter profits from taxes. Higher rates provide an added benefit for risk-taking.

When I graduated high school in 1963, the individual tax rate on married couples was 75 percent on income over $100,000. It was 91 percent on income over $400,000. This was during the Kennedy/Johnson administration.

When I graduated college in 1969 the rates had declined only very modestly to 70 percent on joint incomes over $200,000. This was the beginning of the Nixon Administration. These rates remained relatively unchanged for the following 12 years, through 1981, including the Ford and Carter administrations. The Reagan years followed, lowering individual tax rates throughout his eight years in office.

Looking at the issue historically, how did the extremely high rates of the 1960s through 1981 affect job growth?

In the eight years of the Kennedy/Johnson era, job growth averaged 3.25 percent annually.

In the eight years of the Nixon/Ford era, job growth averaged 2 percent annually.

The four Carter years again provided 3.2 percent annual job growth.

Then came the reduced tax rates of the eight-year Reagan Administration term. Job growth averaged 2.1 percent.

Two Bush presidencies sandwiched the Clinton administration. The combined 12 years of the low tax rate of the Bush presidencies showed the lowest job growth in modern times. Annual rates of job creation averaged less than one-fourth of 1 percent, while the highest individual rates were dropped to 35 percent.

In between the two Bushes, the Clinton Administration raised tax rates on the wealthiest Americans.

The eight Clinton years showed average job growth rebounding to 2.5 percent, a dramatic difference from the lower tax rates of both Bush administrations.

How did the economy thrive during periods of seemingly confiscatory tax rates? It seems likely that the wealthy did not actually pay those rates. With rates that high, individuals and small businesses scrambled to avoid paying those rates by reducing income and profits. Increased tax deductions and business expenses were used to reduce taxable income. Hiring additional employees, buying new equipment — expanding — caused reduced tax liabilities.

When rates are low, the wealthy seek to maximize income. It is good tax planning to report (“bunch”) high income in low tax years. Expansion years are not normally high income years. It takes time for investment in plant, equipment, new employee hiring and training to pay off in higher earnings. Therefore, low tax rates invite complacent, non-risk taking behavior. Raising rates provides the incentive to take action to shield profits from these new higher rates.

The historical record clearly does not support the claim from The Right that, “lowering taxes on the wealthy, creates job growth.” But the truth of the matter is that the exact opposite is the case. It does make sense that The Right would not want to disclose this economic reality.

R. G. Rich is a retired IRS agent living in Tucson, Ariz. He can be contacted at richsqrd@gmail.com

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