Tax Cuts And Deregulation Hurt The Economy


Posted on 21 December 2009

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By Dave Johnson

A letter in Tuesday's San Jose Mercury News expresses the misguided but oft-repeated Republican "spin" that tax cuts and deregulation "create jobs".  As usual it bears little resemblance to the truth.
   
Create jobs by helping business

The two ways government can affect the job market are by spending on projects through borrowing or by reducing the tax burden on families and businesses. If it borrows, it causes another tax through inflation and interest expenses that will go on forever. If it reduces taxes and regulations, the loss in revenue will be far less than the amount the Democrats are planning to spend, and without any interest. You create jobs by making it easier for businesses to hire people through reductions in taxes and regulations, such as a tax break for every person they hire and retain. You don't make it harder for them by raising their expenses. Let's do what worked in the past.

The writer is correct about the tax through interest expenses that is the result of borrowing, but incorrect about the effect of tax cuts.  In fact, it is tax cuts that have caused so much borrowing without helping the economy.  Here is what is wrong about the idea that tax cuts create jobs:

   1. Businesses hire the employees they need to hire to meet demand. If demand is low no amount of tax cuts can induce a business to hire people. Why hire and pay people to have them just sit around?

   2. The way to get more customers into the businesses - i.e. to create demand - is to get more money circulating in the pockets of regular people. Cutting taxes for the already well-to-do doesn't accomplish this. The way to do this is with government policies that increase wages and reduce working hours, like how raising the minimum wage and mandating 40-hour weeks and weekends off helped create America's middle class. Helping regular people is good for business.

   3. The writer says we should do what has worked in the past. The fact is that the economy has always done better when the tax rates on the wealthy and corporations were highest. Just look it up. The reason for this is that our economic system when left to itself always becomes a low-age, everything-to-the-top system, because the wealthiest always game the system to get the most for themselves. The way to fix that is to apply regulations to prevent this, and high taxes at the top so the government can implement policies that raise the wages of the rest of the public. This is how we got out of the depression after the huge concentration of wealth that built up until 1929.

   4. Taxes are not an "expense." Businesses pay taxes on the profits (revenue minus expenses) -- so the businesses that need help don't need tax cuts, they need customers. It doesn't make sense to try to help businesses that are not doing well by giving even more money to their profitable competitors. We should be using that money to instead help the businesses that need the help. Helping the already well-to-do is bad for business.

There are no examples in history of deregulation and tax cuts creating a better economy, but plenty of these steps creating worse economies. And before you say it, Reagan's tax cuts were followed immediately by huge tax increases, and still led to the tremendous borrowing and interest payments that the writer is worried about. And to make matters worse, Reagan's deregulation almost led to economic collapse twice - first with the Savings and Loan crisis, and then with the recent financial crisis.

To fix California's economy we need to ask the wealthy and corporations to start contributing their share again, and use that money to educate our students, rebuild our infrastructure and bring back the kind of state that created and attracted the semiconductor and electronics and biochem and other industries. This all occurred when taxes were high, not low.

The only economy that is ever helped by tax cuts is the economy of the Cayman Islands, where many of the rich store their hoards of cash.

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Dave Johnson is Founder and principal author at Seeing the Forest, and a blogger at Speak Out California. Dave is a Senior Fellow with the Institute for the Renewal of the California Dream working on progressive messaging, a Fellow at Campaign for America's Future, where he writes about issues involving American manufacturing, trade, what might be called industrial policy and a Fellow at the Commonweal Institute, where he researches and writes about the relationship between corporations and democracy.