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Friday, July 29, 2011

Taxes create jobs!

"Taxes kill jobs" - Speaker of the House John Boehner, at least once a day for the last few weeks. (At least it seems like it.)

That statement is an oversimplification, at best, and tends to be deceptive.

Why is it an oversimplification? How are Speaker Boehner and his staff paid? By the tooth fairy? No. By taxes.* And, of course, they have jobs, supported by US taxpayers.

The Speaker is partly right. Consider a hypothetical state or city where all income, business or personal, was completely taxed, all of it went to the government. Businesses would have little motivation to establish themselves in such an area, and, thus, there would be few or no jobs available. People looking for work wouldn't live there, if they could help it. Even the job of tax collector would be non-existent, because there would be too little tax money coming in to pay for such people. So, in that case, taxes would kill jobs.

However, consider the opposite situation, a state or city where there were no taxes. With no income, government would be unable to provide infrastructure, police and fire protection, a justice system, schools and hospitals, or regulatory apparatus, and, again, there would be few businesses, or people, who would want to locate in such a place. So no taxes would also kill jobs. A situation where there are tax revenues sufficient for the government to do its job would make job creation possible, rather than preventing job creation. So the Speaker is only partly right, and seriously wrong.

The Federal Aviation Administration has recently had to furlough about 70,000 workers, mostly construction workers, because Congress can't agree on funding the agency.

The ideal, then, must be somewhere between 100% and zero taxation. What rate is ideal? That's certainly a matter for legitimate debate, but to say that taxes kill jobs is not stating the full truth. Taxes can help create jobs.

There's another reason why taxes don't kill, but can create jobs. Private businesses do not generally engage in research into new areas of science. For example, most of the initial development of the laser, both theoretical and initial construction and assembly, was done by scientists in academic, or military laboratories, funded by taxes. Without the laser, CDs, DVDs, computer hard disks, and many other devices that we now take for granted, all of them requiring the employment of skilled labor to produce and repair, and all of them providing employment for salespeople, would not be possible. Although some fundamental research and development is carried out in industry labs, much of it is not, and it is usually the most radical research that is carried out in academic labs, and the most radical research often makes whole new categories of employment possible. Countries, or local areas, that develop these new categories will probably become more competitive. They will be adding new jobs. Much of our present position as the world's largest economy has been possible because of research and development done in the past, much of it funded by tax money.

The Internet, exploration of the solar system, large telescopes and similar devices, high-energy physics, and the human genome project, to name a few rather spectacular items, were developed largely with money from governments, that is, from tax money. At least the first of these has led to a great many jobs, and the others have or probably will also do so. To be sure, there have been major research endeavors funded privately, such as PARC, the Carnegie Laboratories, and Bell labs.

The United States didn't become an economic powerhouse by lowering taxes. It became so, at least partly, because of costly efforts, governmental or private, to carry out and implement scientific research.

Thanks for reading. Pay your taxes.

*I have been reminded that governments can get revenue in other ways than through taxes, such as through usage fees (like sewage fees, or license fees). But I'm describing them all as taxes, as the politicians in Washington generally do.

On August 1, 2011, I'm adding the following:
There are frequent assertions as to the effect of tax policy on job creation, by politicians of various persuasions. I saw part of a debate on this matter between Senators Durbin and McCain on this issue yesterday, on the Senate floor. My take is that there are too many variables. So many, in fact, that it's impossible to know for sure, for example, whether the so-called Bush tax cuts helped to create jobs, or didn't. Connection of tax policy to jobs has never been done as a controlled experiment, with a single independent variable (tax rate, or some other tweaking of tax regulations), accompanying the measurement of the dependent variable (number of jobs). It is impossible to perform such an experiment, with only one variable. Variables include fluctuations in world markets, changes in the number of people seeking employment, the prices of raw materials that we depend on (such as oil), tariffs on our goods, the values of other currencies and ours, and other variables. So politicians pretty much draw whatever conclusion they want from the data.

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On December 20, 2011, I came across a posting by Politifact, a non-partisan entity, that discusses the matter of taxes and small businesses. It's a complicated subject, as they point out, but increasing taxes on the wealthiest persons would have much less impact on small businesses than Speaker Boehner has said.

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November 10, 2012: I should have known about the Wikipedia article on the Laffer curve, which repeats much of what I said above, more authoritatively, and also says, that an analysis by the non-partisan Congressional Budget Office studied the probable effects of cutting taxes: [In the] paper's most generous estimated growth scenario, only 28% of the projected lost revenue from the lower tax rate would be recouped over a 10-year period after a 10% across-the-board reduction in all individual income tax rates. In other words, deficits would increase by nearly the same amount as the tax cut in the first five years, with limited feedback revenue thereafter.

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June 22, 2016: Republican Presidential candidate Donald Trump, not known for always anchoring his pronouncements in facts, has claimed that the US has the highest individual tax rate in the world. Politifact has researched that claim thoroughly, and determined that it is false. They do say that the US has a high, perhaps the highest, corporate tax rate in the world. 


Anonymous said...

I thought this might intrigue you. In it is an idea that government actually does not affect the employment rate. It's from This American Life.

Martin LaBar said...

Thanks. I heard about that, although I haven't listened to it yet. I understand that there are debates over the government role in creating jobs, and perhaps it doesn't have as much as some people think. But no government is a route I don't think we want to take.

Craig said...

Thanks for posting this. It was enlightening to consider what a state without taxes would be - anarchy.

Martin LaBar said...

Yes. Anarchy. Although something like the Mafia would take over, in some areas, I suppose.