Barack Obama had barely finished announcing his deficit-reduction plan this week before John Boehner, the Republican House Speaker, dismissed the President’s proposed tax increases on wealthy Americans as a blow to “job creators.” That phrase has been coming up a lot lately in Washington. The notion that the rich drive job creation and that taxing upper incomes is a “job killer” is a powerful line and difficult to refute between commercial breaks. But like a lot of political memes, it suffers from one shortcoming: It’s not at all clear that it’s true.
“There’s very limited evidence to support the claim that increased personal income tax rates on higher-income people would reduce hiring,” says Joel Slemrod, who served as senior tax economist for President Ronald Reagan’s Council of Economic Advisers. Cutting taxes on upper incomes may have economic benefits, but it’s not an especially powerful way to create a lot of jobs quickly.
The big difference between the rich and everyone else is that they are more likely to save money from a tax cut since they already have enough to live on, says Alan Viard, an economist at the conservative American Enterprise Institute. They may buy a yacht, but plenty is left over for their portfolio. In the long run, all the money the rich save as a result of lower tax rates means there is more available to be invested in business through banks or the stock market. That should eventually lead to higher standards of living—and, yes, more jobs. But it takes time for that to be felt.
If politicians are looking to create jobs right away, they’d be better off concentrating their efforts lower down on the income ladder. The poor and middle class are more apt to spend extra money, maybe on groceries or a new refrigerator, helping to spur the economy immediately. The No. 1 reason small business owners say they’re not hiring is poor sales. A Congressional Budget Office report looking at economic multipliers found tax cuts for low- and middle-income families are more than twice as powerful in stimulating immediate demand as tax cuts for the wealthy. “The short-run/long-run is the critical thing,” Viard says. “If the goal is to have more jobs 6 months, 12 months from now, you want to increase aggregate demand. If the goal is to have a high standard of living 10, 20 years from now, you want to increase national savings.”
Even that long run picture is not so clear. Under Bill Clinton, taxes on higher-income families were high compared to now, at 39.6 percent. Yet almost 23 million jobs were added vs. net job growth of 1.1 million during George W. Bush’s lower-tax years. In the 1950s, a Golden Age of growth, the top marginal tax rate was as high as 91 percent. There were many other economic forces at work in each of these periods, making direct comparisons difficult. Still, says Slemrod, now a professor at the University of Michigan, “it disproves the idea tax increases are the kiss of death.”
The benefits of the tax cuts are muddied further if there’s a budget deficit. “Despite all the rhetoric that tax cuts promote economic growth, that is not the case when the tax cuts are not paid for,” says Martin Sullivan, a former tax economist for the U.S. Treasury Dept. and now an analyst for the nonpartisan publication Tax Notes. As Viard puts it, “Anyone who tells you they have conclusive results, you should be wary of.”