The Politics of Job Creation

With the election over, the nation turns its sights to its elected leadership to see what is going to happen now regarding the “fiscal cliff”—that is, the tax increases and spending cuts that will go into effect on January 1, 2013 unless legislative changes are adopted.

Both parties want to avoid an automatic tax increase for the majority of Americans, but they are at a stand still regarding the Bush era tax cuts for the wealthiest Americans.  Republicans want them extended, while Democrats want to let them end automatically.

For conservatives, the reason for extending the tax cuts for everyone, including the wealthiest Americans, is rooted in a deeply held belief that the wealthy create jobs.  Thus, by lowering taxes for the wealthiest Americans the economy will improve as they have further capital to create new jobs and, consequently, reduce the unemployment rate.  A detailed explanation of Paul Ryan’s tax plan (though he does not represent the views of every Republican) provides insight into the logic of Republican tax policy as it relates to job creation.

While there are many factors that contribute to both the unemployment rate and the rate of job creation, this claim is often asserted in such a manner as to suggest a one-to-one between lower taxes (for everyone, particularly the most wealthy) and an improved, growing economy (i.e. increasing jobs and decreasing unemployment).

To better assess the accuracy of this claim, it is helpful to compare the unemployment rate (as reported by the United States Bureau of Labor Statistics) and the effective tax rate (as reported by the Congressional Budget Office) for the years 1979 to 2007 (the years for which CBO has published data).

Year Unemployment Rate Effective Tax Rate of Top 10% of U.S. Households
1979 5.8 29.6
1980 7.1 29.0
1981 7.6 28.2
1982 9.7 25.3
1983 9.6 24.8
1984 7.5 25.2
1985 7.2 24.7
1986 7.0 24.3
1987 6.2 27.2
1988 5.5 26.7
1989 5.3 26.3
1990 5.6 26.1
1991 6.8 26.6
1992 7.5 26.9
1993 6.9 28.6
1994 6.1 29.4
1995 5.6 29.8
1996 5.4 30.1
1997 4.9 29.9
1998 4.5 29.3
1999 4.2 29.7
2000 4.0 29.6
2001 4.7 28.5
2002 5.8 27.9
2003 6.0 26.8
2004 5.5 27.1
2005 5.1 27.6
2006 4.6 27.6
2007 4.6 26.7

Before proceeding further, let me say that I am well aware that statistical data can be used to “prove” conflicting perspectives.  I have no doubt that a conservative Republican might look at the data and reach very different conclusions. Moreover, there are many factors influencing the economy and the unemployment rate besides effective tax rates.

Nevertheless, what the data suggests to me is that the assertion that lower tax rates for the wealthy inevitably leads to economic improvement is not accurate, at least not the one-to-one correlation that is usually implied.

The data above does not seem to suggest a clear statistical correlation to support the conservative claim.  If anything, some of the data suggests that the opposite is true (though the data above is not sufficient to make such a definitive claim), a possibility also expressed in a recent U.S. News and World Report opinion piece.  Further information about the effects of taxes on wealth can be found in an October 2011 CBO report.

In the years when unemployment was 5% or lower (1997-2001), the effective tax rate for the wealthiest 10% of households was among the highest reported (29.9; 29.3; 29.7; 29.6; and 28.5, respectively).

In the years when unemployment was over 9% (1982-1983), the effective tax rate for the wealthiest 10% of households was among the lowest reported (25.3 and 24.8, respectively).

This should not be received as a critique of or commentary on the conservative, Republican vision regarding how the nation should be governed.  There is much more to their platform than lowering the effective tax rate for the wealthy in order to create jobs.

The purpose of this article is simply to address the predominant reason cited by conservatives for lowering taxes for the wealthy—“the wealthy create jobs”—based on the idea that lower taxes for the wealthy results in job creation and economic improvement.

This idea has been voiced so frequently and with such conviction that many, perhaps most, people receive it with little, if any, incredulity.

I do not doubt the sincerity of those who believe that “trickle down economics” is the best approach to create jobs and improve the economy.  Yet, the data causes me to question the accuracy of the claim, however sincerely it may be asserted.

Beyond the data above, a recent report issued by the non-partisan Congressional Research Service challenged this central claim of the GOP by concluding that tax cuts for the wealthy do not necessarily lead to job creation, lower unemployment and overall economic growth.

The report received much criticism from conservatives, resulting in the CRS removing the published report from their website.  The specific reason for this action is unclear, but a full text of the CRS findings has been posted here.

The lack of a clear correlation in the data above, coupled with the CRS report, should cause us to question (and further research) the claim that there is a direct relationship between a lower effective tax rate for the wealthiest Americans and economic growth (i.e. more job creation and less unemployment).

It is important that one’s statements can be substantiated by the available data.  If the data does not support one’s views (no matter how deeply cherished these beliefs) they should be reformed to more accurately reflect reality.

We form our ideologies and ideas based on the data available to us at the time.  Continuing to educate and inform ourselves is important to form more accurate perspectives, because new information can challenge, clarify or confirm our current views.

An ideological crisis can arise when we encounter data that reveals (or suggests) that our deeply held beliefs, ideas or ideologies are incorrect.

When this occurs we have a decision to make.  We can disregard the new data as faulty and continue on as before or we can research and reflect upon the information and decide whether our views need to change (sometimes fundamentally, other times minutely, still other times not at all).

The latter approach is the most profitable endeavor, as it requires one to look deeply at one’s ideas for coherence with the new data, which leads to personal growth and development.

Even if one’s views remain unchanged after considering new information, it is much more beneficial and constructive to face the presented data (even if you ultimately reject the information as inaccurate) than it is to bury one’s head in the proverbial sand by refusing to consider the possibility that one’s perspectives (however deeply held) might be based upon inaccurate information.


One response to “The Politics of Job Creation

  1. Pingback: NBC News Report: “Boehner’s fiscal path forward: ‘God only knows’” by Michael O’Brien | Waking to Mystery·

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