We hear it continually, it is the mantra of conservatives: “we must give tax breaks to the wealthy so they can create more jobs…and higher taxes will stifle economic growth…because the rich are the job creators…” It is the basis of all the tax breaks given the top income groups in recent years, including the contentious extension of the Bush tax cuts to top brackets, last year. It is the common subject of conservatives on the talk shows. Just last weekend, Paul Ryan, now the architect of the new Republican budget, reaffirmed his proposal to cut the top tax rate to 25% claiming in his plan: …advancing pro-growth tax reforms, this budget is a jobs budget. It sends signals to investors, entrepreneurs, and job creators that a brighter future is still possible.
There is only one thing wrong with this premise and theory. It is not true! There is absolutely no empirical evidence to support such a claim. None! Yet, those who purport it continue to glibly make the claim as though it were fact. And for good reason, it gives them cover for avoiding the charge that they are merely attempting to make the rich richer; and it also permits them to focus on deficit reduction through smaller government rather than having to address the revenue side of the equation as well. Indeed, there is actually evidence that there is not only no correlation between granting the wealthy tax relief to “grow the economy”, there is even some evidence that the contrary is frequently true.
Since 1945, the increases in the Federal deficit went up 4.2% under Democratic administrations; and 36.4% under Republican presidents (source CBO). That is not as relevant as the fact that the deficit increase was coincidental with GOP presidents who reduced taxes – most notably Reagan (deficit up11.2% & 5.9% in his two terms); George H. W. Bush (6.5%); and especially George W. Bush (up 9% and10.7%). While it may be argued, this is not necessarily related to “job creation”, it is related to increases in GDP (debt/GDP ratio) or relative robustness of the economy. These presidents cut taxes, increased debt, but the economy did not grow accordingly. In short, as with historical “trickle down” strategies…it failed.
Joel Slemrod, Professor of Stephan Ross School of Business at the University of Michigan, and Harvard PhD, who studies and writes about this phenomena, has noted: judging by the political scene in Washington, one would think that low taxes were the main source of economic growth in the United States and around the world…even most Democrats dare not demand that President Bush’s tax cuts be rescinded…but there is no compelling evidence that high taxes impede economic growth.
Based on his above findings, Slemrod wrote: “there is no supportive evidence for the claim that low taxes guarantee prosperity. In fact, if you just plot out the points (internationally), you will find a clear, positive correlation between high tax rates and prosperity, and that is because developed countries are the ones with the high tax ratios.” And similarly regarding capital gains tax reductions, “That argument is not implausible, but I know of no evidence that establishes a connection between prosperity and at what rate we tax capital gains.” The fallacy is most apparent at the highest end of tax forgiveness.
In recent years, the top 400 taxpayers had an average annual income of $344.8 million, up from their average $263.3 million income in 2006, according to figures in a report that the IRS issued. Their effective income tax rate fell to 16.62 percent. That rate is lower than the typical effective income tax rate paid by Americans with incomes in the low six figures. Giving the rich a tax break is obviously not needed – they figure out their own tax benefits. Yet, there is absolutely no real evidence that this generous tax advantage among the upper wealthy is incenting them to create new jobs. It simply is not happening. Folks this rich, do not need to trivialize themselves creating new jobs; and Ryan’s tax proposal is simply ridiculous for this group; they can get along very well with about $300 million after taxes. The facts are further described in a new report on angel and VC investing in 2010.
Virtually everyone concedes is will be small businesses, and often “start ups” that will propel an improved economy, But despite the low tax rates (now extended), this report confirms that wealthy angel investors are not increasing investing in new job creation. In fact, they are investing less. Total investments in Q1,2 2010 were $8.5 billion, a decrease of 6.5% over Q1,2 2009, according to the Center for Venture Research at the University of New Hampshire. Angel investors have decreased their appetite for seed and start-up stage investing, with 26% of Q1,2 2010 angel investments in the seed and start-up stage, marking a steady decrease in the seed and start-up stage that began in 2008 (45%) and 2009 (35%), and it is the smallest percentage in seed and start-up investing for several years. This significant percentage of latent investors indicates that while many high net worth individuals may be qualified investors, they have not converted this interest into direct participation – and it is not taxes that are driving their decisions. Much more important are the return on investment and viability of the the project -- NOT taxes.
In short, the premise and the promise that giving substantial tax breaks to the very wealthy will stimulate the economy, and “create new jobs”, simply has no basis in fact or reality. What it has done, factually, is to increase the deficits whenever it has been tried…it further confirms the failure of trickle down economics…and it has made the already wealthy, wealthier. It also makes for great sound bites for conservative proponents of the plan. But what is has not done is to create new jobs as proponents have portrayed – because that is a myth.