Summary

Despite demanding immediate deficit reduction in a difficult economy, conservatives insist that any increase in tax rates for top income earners will kill jobs. Instead, they argue for lowering tax rates on the wealthiest Americans (while downplaying the deficit impact of such a tax cut) as way to increase hiring. There is no evidence for this argument, however intuitive it may seem. Lower tax rates on the rich are not associated with more hiring or stonger GDP growth, and while conservatives insist that top income tax rates hit small businesses heavily, their ludicrous definition of “small business” renders that statement meaningless. Along with the threat of higher taxes, conservatives insist that federal regulations are holding back job creation and have made loosening the rules a focus of their agenda. However, tax breaks for the wealthy and deregulation do almost nothing to increase consumer demand, which is the true driver of hiring and expansion decisions.

Tax Breaks For The Wealthiest Americans Do Not Create Jobs Or Grow The Economy

Lower Top Marginal Tax Rates Are Not Historically Associated With More Job Creation Or Economic Growth. The following two charts from the Center for American Progress show the average annual growth in GDP and total payroll employment, by top marginal tax rate since 1950:

According to CAP: “These numbers do not mean that higher rates necessarily lead to higher growth. But the central tenet of modern conservative economics is that a lower top marginal tax rate will result in more growth, and these numbers do show conclusively that history has not been kind to that theory.” [Center for American Progress, 6/27/11; Center for American Progress; 6/21/11]

CBO: Reducing Income Taxes Is Less Effective Than Other Policies To Encourage Job Growth. According to the Congressional Budget Office:

• Policies that would have the largest effects on output and employment per dollar of budgetary cost in 2012 and 2013 are ones that would reduce the marginal cost to businesses of adding employees or that would be targeted toward people who would be most likely to spend the additional income. Such policies include reducing employers’ payroll taxes (especially if limited to firms that increase their payroll), increasing aid to the unemployed, and providing additional refundable tax credits in 2012 for lower- and middle-income households.

• Policies that would primarily affect businesses’ cash flow but would have little impact on their marginal incentives to hire or invest would have only small effects. Such policies include reducing business income taxes and reducing tax rates on repatriated foreign earnings.

CBO prepared the following chart showing the projected effect on employment of various policy options:

[CBO.gov, 11/15/11]

Bloomberg: “Give The Wealthiest Americans Americans A Tax Cut And History Suggests They Will Save The Money Rather Than Spend It.” As reported by Bloomberg: “Give the wealthiest Americans a tax cut and history suggests they will save the money rather than spend it. Tax cuts in 2001 and 2003 under President George W. Bush were followed by increases in the saving rate among the rich, according to data from Moody’s Analytics Inc. When taxes were raised under Bill Clinton, the saving rate fell. The findings may weaken arguments by Republicans and some Democrats in Congress who say allowing the Bush-era tax cuts for the wealthiest Americans to lapse will prompt them to reduce their spending, harming the economy.” [Bloomberg, 9/14/10]

CRS: Allowing Tax Cuts For The Rich To Expire Will Reduce Deficits “Without Stifling The Economic Recovery.” According to Reuters: “Letting tax rates for the wealthy rise will not put a short-term damper on the economic recovery, according to a report by the non-partisan research arm of the U.S. Congress. […] Republicans want the cuts continued for all income groups while Democrats favor letting them expire for the most affluent Americans. ‘If the economy is still weak, a temporary extension (of all the rates) will not harm the economy,’ despite adding to the deficit, the CRS report said, citing CRS economist Thomas Hungerford. But allowing the rates to rise just for the wealthy could help ‘reduce budget deficits in the short term without stifling the economic recovery.’” [Reuters, 7/19/12]

Bush Tax Cuts Led To Falling Family Income, Weakest Economic Growth Since World War II

Even Prior To 2007 “Great Recession,” Period Following Bush Tax Cuts Had “Slowest Average Annual Growth Since World War II.” From David Leonhardt of the New York Times:

Why should we believe that extending the Bush tax cuts will provide a big lift to growth? Those tax cuts passed in 2001 amid big promises about what they would do for the economy. What followed? The decade with the slowest average annual growth since World War II. Amazingly, that statement is true even if you forget about the Great Recession and simply look at 2001-7. […] Here’s a chart ranking five-year periods over the past 50 years, in descending order of average annual growth:

[New York Times, 11/18/10, emphasis added]

Median Household Income Fell For The First Time On Record Following The Bush Tax Cuts.  From the Center for American Progress: “Looking at median household incomes is even more telling than median wage growth because it gives a better sense of a family’s total resources. Whereas a high median wage might be offset by fewer hours worked, median income is an overall measure of income. The Bush economic cycle saw the first decline in median household incomes of any cycle since 1967, when the Census Bureau began tracking household data. [Center for American Progress, February 2009]

Despite Conservative Rhetoric, Few Top Income Taxpayers Are Actual “Small Businesses”

CBPP: “Only 2.5 Percent Of Small Business Owners Face The Top Two Rates.” According to the Center on Budget and Policy Priorities: “Allowing the top two marginal tax rates to return to pre-2001 levels as scheduled next year would affect very few small businesses, a recent Treasury Department study found.  The study shows that only 2.5 percent of small business owners face the top two rates.” [Center on Budget and Policy Priorities, 7/19/12, internal citations removed]

• Conservatives Rely On Definition Of “Small Business” That Counts President Obama And Mitt Romney. According to the Center on Budget and Policy Priorities: “The claims that allowing the Bush tax cuts for high-income people to expire would seriously harm small businesses rest on an exceedingly broad, and misleading, definition of ‘small business.’ The definition is so broad, in fact, that under it, both President Obama and Governor Romney would count as small business owners — as would 237 of the nation’s 400 wealthiest people.” [Center on Budget and Policy Priorities, 7/19/12, internal citations removed]

• Conservative Definition Of “Small Businesses” Includes Multi-Billion-Dollar Corporations Like Bechtel And PricewaterhouseCoopers. According to the Center for American Progress: “‘That’s 750,000 small businesses in America, the most productive, the ones that are the most successful, getting hit by a tax increase on top of everything else that’s happened to them in the last 18 months of this administration,’ said Senate Minority Leader Mitch McConnell (R-KY). But McConnell’s number is only accurate if you take an incredibly expansive view of what constitutes a small business. Included in that 750,000 is the Bechtel Corporation, the largest engineering firm in the country. It is the fifth-largest privately owned company in the United States, posting gross revenue in 2008 of $31.4 billion. […] The auditing firm PricewaterhouseCoopers, which has operations in more than 150 countries, fits the bill as well.” [Center for American Progress, 10/21/10]

• Former Bush Economist Alan Viard: GOP’s Definition Of Small Businesses Is A “Fallacy.” As reported by the Washington Post: “Which is why Republicans continually define pass-through entities of all sizes as small businesses, a position [former Bush White House economist Alan] Viard called a ‘fallacy.’ ‘How can it be that 3 percent of owners are accounting for 50 percent of small business income? Those firms they’re owning can’t be all that small,’ Viard said. ‘And that’s true. They’re very large.’” [Washington Post, 9/17/10]

Joint Committee On Taxation: “3.5 Percent Of All Taxpayers With Net Positive Business Income” Fall Into Top Tax Bracket. According to the Joint Committee on Taxation: “The staff of the Joint Committee on Taxation estimates that in 2013 approximately 940,000 taxpayers with net positive business income (3.5 percent of all taxpayers with net positive business income) will have marginal rates of 36 or 39.6 percent under the president’s proposal, and that 53 percent of the approximately $1.3 trillion of aggregate net positive business income will be reported on returns that have a marginal rate of 36 or 39.6 percent.” [Joint Committee On Taxation, 6/18/12]

Congressional Research Service: High-End Tax Cuts “Are Not Efficiently Targeted To Small Businesses.” From the CRS: “As the findings in this report suggest, across-the-board tax cuts for high income individuals are not efficiently targeted to small businesses. […] This report has examined the justification for retaining the lower rates for the top two tax rates because of concerns that allowing them to rise will reduce job creation by small businesses. An important reservation about such a justification is that lowering the top tax rates benefits only a small share (3% or so) of businesses, and 80% or more of the tax cut’s benefits do not accrue to business.” [Congressional Research Service, 9/3/10]

Those In The Top Bracket Still Benefit From Middle-Income Tax Cuts. According to the Center on Budget and Policy Priorities:

Furthermore, as Figure 2 shows, under the proposal to allow tax cuts on income above $250,000 ($200,000 for single filers) to expire, taxpayers in the top two brackets would still keep sizeable tax cuts on the first $250,000 of their income ($200,000 for single filers).

[Center on Budget and Policy Priorities, 7/19/12]

Conservative Argument That Deregulation Will Save The Economy Is Not Supported By Evidence

Washington Post: Economists Find “Little Evidence” That Regulations Have A Significant Impact On Overall Employment. According to the Washington Post: “Economists who have studied the matter say that there is little evidence that regulations cause massive job loss in the economy, and that rolling them back would not lead to a boom in job creation.” [Washington Post, 10/19/11]

McClatchy: “Little Evidence” To Support Blaming “Excessive Regulation And Fear Of Higher Taxes For Tepid Hiring.” As reported by McClatchy: “Politicians and business groups often blame excessive regulation and fear of higher taxes for tepid hiring in the economy. However, little evidence of that emerged when McClatchy canvassed a random sample of small business owners across the nation. ‘Government regulations are not ‘choking’ our business, the hospitality business,” Bernard Wolfson, the president of Hospitality Operations in Miami, told The Miami Herald. ‘In order to do business in today’s environment, government regulations are necessary and we must deal with them. The health and safety of our guests depend on regulations. It is the government regulations that help keep things in order.’” [McClatchy, 9/1/11]

• McClatchy: “Some Pointed To The Lack Of Regulation In Mortgage Lending As A Principal Cause Of The Financial Crisis.” As reported by McClatchy: “McClatchy reached out to owners of small businesses, many of them mom-and-pop operations, to find out whether they indeed were being choked by regulation, whether uncertainty over taxes affected their hiring plans and whether the health care overhaul was helping or hurting their business. Their response was surprising. None of the business owners complained about regulation in their particular industries, and most seemed to welcome it. Some pointed to the lack of regulation in mortgage lending as a principal cause of the financial crisis that brought about the Great Recession of 2007-09 and its grim aftermath.” [McClatchy, 9/1/11]
• National Association For Business Economics Economic Policy Survey: 80 Percent Of Members Say Current Regulatory Environment “Good” For Businesses. From the NABE’s August 2011 Economic Policy Survey: “Regulatory activity has gained a lot of attention, with many groups suggesting that American businesses are overregulated by the current administration. With that said, 80 percent of survey respondents felt that the current regulatory environment was ‘good’ for American businesses and the overall economy.” [NABE.com, August 2011]

ProPublica: Regulations Mostly “Just Shift Jobs Within The Economy.” As reported by ProPublica: “But is the claim that regulation kills jobs true? We asked experts, and most told us that while there is relatively little scholarship on the issue, the evidence so far is that the overall effect on jobs is minimal. Regulations do destroy some jobs, but they also create others. Mostly, they just shift jobs within the economy. ‘The effects on jobs are negligible. They’re not job-creating or job-destroying on average,’ said Richard Morgenstern, who served in the EPA from the Reagan to Clinton years and is now at Resources for the Future, a nonpartisan think tank.” [ProPublica, 9/21/11]

Regulatory Expert: “Current Rhetoric About Regulation Killing Jobs Is Nothing More Than Not Letting A Good Crisis Go To Waste.” From ProPublica: “‘The issue in regulation always should be whether it delivers benefits that justify the cost,’ said [Roger] Noll[, co-director of the Program on Regulatory Policy at the Stanford Institute for Economic Policy Research]. ‘The effect of regulation on jobs has nothing to do with the mess we’re in. The current rhetoric about regulation killing jobs is nothing more than not letting a good crisis go to waste.’” [ProPublica, 9/21/11]

Former Reagan Adviser: “Regulatory Uncertainty Is A Canard Invented By Republicans” And Unsupported By The Facts. According to former Reagan adviser Bruce Bartlett: “These constraints have led Republicans to embrace the idea that government regulation is the principal factor holding back employment. They assert that Barack Obama has unleashed a tidal wave of new regulations, which has created uncertainty among businesses and prevents them from investing and hiring. No hard evidence is offered for this claim; it is simply asserted as self-evident and repeated endlessly throughout the conservative echo chamber. […] In my opinion, regulatory uncertainty is a canard invented by Republicans that allows them to use current economic problems to pursue an agenda supported by the business community year in and year out. In other words, it is a simple case of political opportunism, not a serious effort to deal with high unemployment.” [New York Times, 10/4/11]

The Key To Job Growth Is Consumer Demand

Wall Street Journal: “Scant Demand, Rather Than Uncertainty Over Government Policies,” Is “The Main Reason” For Slow Recovery In Jobs Market. From the Wall Street Journal: “The main reason U.S. companies are reluctant to step up hiring is scant demand, rather than uncertainty over government policies, according to a majority of economists in a new Wall Street Journal survey. […] In the survey, conducted July 8-13 and released Monday, 53 economists—not all of whom answer every question—were asked the main reason employers aren’t hiring more readily. Of the 51 who responded to the question, 31 cited lack of demand (65%) and 14 (27%) cited uncertainty about government policy. The others said hiring overseas was more appealing.” [Wall Street Journal, 7/18/11]

Wall Street Journal: Businesses Need “A Burst In Demand Strong Enough To Propel Hiring.” As reported by the Wall Street Journal: “Forecasting firm Macroeconomic Advisers, which sees growth at a 2.3% pace in the second half of this year and 2.8% in 2012, expects firms to keep banking strong profits. But even if businesses remain strong enough to make it through a slowdown, they may have to wait longer for a burst in demand strong enough to propel hiring. ‘The biggest problem is that their order books are thin,’ said Macroeconomic Advisers chairman Joel Prakken. ‘They need fat order books to add people. They need fat order books to buy machines.’” [Wall Street Journal, 8/29/11]

Wall Street Journal: Because People Are Spending Less, Businesses Are Holding $2 Trillion On Their Balance Sheets Rather Than Hiring. As reported by the Wall Street Journal: “Corporations have a higher share of cash on their balance sheets than at any time in nearly half a century, as businesses build up buffers rather than invest in new plants or hiring. Nonfinancial companies held more than $2 trillion in cash and other liquid assets at the end of June, the Federal Reserve reported Friday, up more than $88 billion from the end of March. […] The reduction of debt could place the economy onto firmer footing in the long run. In the short term, however, the effect of consumers paying off debts and companies hoarding cash is less spending, investing and hiring. Economists call this problem the ‘paradox of thrift,’ when individuals and businesses need to save more to prepare for a downturn, but everyone doing so at the same time makes a downturn more likely.” [Wall Street Journal, 9/17/11, emphasis added]

CBO Director Elmendorf: “Primary Reason” For Persistent Unemployment Is “Slack Demand For Goods And Services.” From a blog post by Doug Elmendorf on CBO.gov: “Slack demand for goods and services (that is, slack aggregate demand) is the primary reason for the persistently high levels of unemployment and long-term unemployment observed today, in CBO’s judgment. However, when aggregate demand ultimately picks up, as it eventually will, so-called structural factors—specifically, employer-employee mismatches, the erosion of skills, and stigma—may continue to keep unemployment and long-term unemployment higher than normal.” [CBO.gov, 2/16/12]

AP: “Most Economists Believe There Is A Simpler Explanation” For Slow Job Growth: “There Isn’t Enough Consumer Demand.” From the Associated Press: “Is regulation strangling the American entrepreneur? Several Republican presidential candidates say so. The numbers don’t. […] Labor Department data show that only a tiny percentage of companies that experience large layoffs cite government regulation as the reason. Since Barack Obama took office, just two-tenths of 1 percent of layoffs have been due to government regulation, the data show. Businesses frequently complain about regulation, but there is little evidence that it is any worse now than in the past or that it is costing significant numbers of jobs. Most economists believe there is a simpler explanation: Companies aren’t hiring because there isn’t enough consumer demand.” [Associated Press, 10/12/11, emphasis added]