The standard right wing talking point that tax cuts for the rich and for corporations create jobs is true: Tax cuts for the rich create jobs overseas.
The tax cuts’ two bills, in 2001 and 2003 – changed laws so that personal income tax rates were reduced, exemptions for the Alternative Minimum Tax increased, and dividend and capital gains taxes also cut.
Yet in the debate, it seems of no moment to either side whether the tax cuts were effective in achieving their goal of spurring business investment and making the US economy more competitive.
Our own examination of US non-residential investment indicates that the reduction in capital gains tax rates failed to spur US business investment and failed to improve US economic competitiveness.
The 2000s – that is, the period immediately following the Bush tax cuts – were the weakest decade in US postwar history for real non-residential capital investment.
Not only were the 2000s by far the weakest period, but the tax cuts did not even curtail the secular slowdown in the growth of business structures.
Rather, the slowdown accelerated into a full decline.
The logic of this is simple enough. If you have money to invest, you’re going to invest it where it’ll return the most. Right now and in the past couple decades that is either in leveraged financial games, or it is in economies which are growing fast and have low costs. The US does not have high growth compared to China or Brazil or many other developing countries. It has high costs compared to those countries as well.
If you can build a factory overseas which produces the same goods for less, meaning more profit for you, why would you build it in the US?
Until that question is adequately answered, by which I mean “until it’s worth investing in the US”, most of the discretionary money of the rich will either go into useless speculative activities like the housing and credit bubbles, which don’t create real growth in the US, or they will go overseas.
There are a number of ways this question can be answered.
- You could slap taxes on foreign capital flows;
- you could slap tariffs on foreign goods produced in low cost domiciles so that companies have to produce in the US to have access to the US market;
- you could push industries which are hard to outsource but don’t actually decrease American competitiveness. The housing bubble increased the cost of doing real business in the US by inflating real estate costs. A massive buildout making every building in the US energy neutral or an energy producer would increase US competitiveness.
- you could try and do what America once did: have a tech boom. If the future is being produced in a country then everyone has to invest there and when things are changing fast you can’t offshore production, because speed matters and offshoring is slow. This is why real wages increased during the tech boom of the 90s.
There are other answers as well, but the point is simpler: you must answer the question “why invest in the US instead of a low cost, high growth country?” Until you answer that question tax cuts will not only not do any good, but in a sense will do harm, by increasing the speed at which jobs are offshored out of America.
Oscar Leroy
Very well said. I wish more people would take on this topic and make it easier to respond to the “give Paris Hilton a million dollars more so she starts a business” crowd.
CMike
There’s a second part to this story. If you raise taxes on incomes small business owners have an added incentive to shelter their profits by reinvesting them in their business rather than take those profits to the craps table. If you raise taxes on long term capital gains or especially on short term capital gains, which are taxed like income, you discourage small business owners from diverting their profits from their productive enterprise to passive, speculative investments.
If you raise taxes on dividends you create an environment in which stock holders would rather see their investment sheltered as an unrealized capital gain in a growing business than returned to them through dividends.
The radio talk show host Thom Hartmann is the only person I ever hear making this point.
David H.
Relying on the rich to re-inflate our economy, or even to invest in the US, is to wait a very long time.
All the tax cuts or punitive tax increases (not that I’m against that) in the world aren’t going to put money in people’s pockets to “demand” goods & services here.
Which is why the federal govt needs to (massively deficit) spend money now, through public works projects, refilling the coffers of state & local govts, whatever — something to create jobs & put money in people’s pockets now.
There are huge amounts of under-utilized resources in this country in the form of human beings. The federal govt can & must utilize them for the public good, because no one else is going to employ them to do anything at all. Once you’ve kick-started the economy, then you can worry about the very necessary infrastructure improvements, build-outs, retrofitting, etc.
There is plenty of work to do in the US, regardless of the neoliberal outsourcing, de-industrialization, cheap labor-exploiting garbage they want to continue implementing under the cover of austerity, disaster capitalism or whatever you want to call it.
Of course, we all know none of this will happen if Obama & his insane clown posse have anything to do with it, much less whatever tea party idiot (Rick Perry) might next take over the White House. The collapse of capitalism continues unabated.
letsgetitdone
Thanks Ian, It’s a great argument against tax cuts for the rich.
General Washington
So, basically, the appropriate response to 30-plus years of not only under – but dis – investment in the United States is to jack up rates on all this non-productive wealth back to pre-Kennedy tax-cut levels.
Whereby we (i.e. the Government) could not only spend that money more productively for the sake of the economy, but do so without exacerbating the deficit/debt issues that apparently matter so much (until they don’t).
Stephen Kriz
Progressives need to take on this nonsensical horseshit about the “wealthy creating jobs” head-on. Capitalists don’t create jobs because they are beneficient, wonderful human beings. They buy labor as one input in their pursuit of profit from selling their goods and services. If they could get away with buying no labor they most certainly would. They can’t. They only make a profit because there is demand for their goods and services. There can only be a demand if people have money to buy them. You see, capital is only fruit created by the efforts of labor. Not the other way around!
Em Hoop
As long as the US has so few people compared to the rest of the world. The filthy rich don’t need to sell us anything . They will sell to all the other countries that want to be as materialistic and consumerist as we have been the last few decades. Get this, they don’t need us, don’t need us, don’t care about us.
Al F.
Thank you – this confirms that business and/or high income/wealth money won’t invest in this country until we raise taxes on them. Then their decisions on investment will include tax avoidance and they will invest here to get the credits. We could be off of oil imports in 10 years if we raised taxes substantially then gave credits for green energy investment. It won’t happen but at least some are beginning to recognize that this may be the biggest problem we have.
dave blu
its too late for this fix. what makes an american company american? corporations are now international entities who if they dont get what they want in the usa they will just incorporate elsewhere. they have become international actors with no affiliation to a land mass–which is what countries are.
more drastic steps are required–like making all food local, and production local. import tariffs would be the generative mechanism (item 2 in paper). raise them 5 % a year for 10 years.