By Michael LaBossiere
It is a matter of faith (or talking point) for most Republicans that tax cuts will increase employment. The most appealing argument for this claim certainly makes sense: if taxes are cut for businesses, then they will have more money. If they have more money, then they will hire more people. From these two premises it follows that if taxes are cut for businesses, then they will hire more people. Going along with this valid hypothetical syllogism (If P, then Q; If Q, then R; so if P, then R) is another stock argument: if taxes are cut for the wealthy, then they will invest more in businesses. If the wealthy invest more in businesses, then businesses will have more money. So, if taxes are cut for the wealthy, then business will have more money. This is also a hypothetical syllogism and is thus a valid argument (the truth of its premises guarantees the truth of its conclusion). These two arguments can be combined into an extended argument which leads from the premise that “if taxes are cut for the wealthy, then they will invest more in businesses” to the conclusion that “if taxes are cut for the wealthy, then businesses will hire more people.” There are also similar arguments about how tax cuts for the wealthy will result in more spending by the wealthy and thus provide businesses with more money to hire people.
In addition to the unquestionable logic of such hypothetical syllogisms (or chain arguments, as they are sometimes called), there is the intuitive appeal of the claim that tax cuts will lead to more hiring because businesses will have more money. But, as every logic teacher points out, a valid argument can have false premises and a false conclusion. There is also the fact that what is intuitively appealing might not be true. As such, what is needed is actual evidence for (or against) the key premises.
Since tax cuts, especially for the wealthy and businesses, are a highly partisan issue any evidence offered will be instantly assaulted as biased by those who disagree. As would be expected, those on the left tend to claim that tax cuts of this sort do not create jobs. Conservatives tend to claim that they do. Politicians, usually from necessity, tend to speak in vague generalities and craft policy aimed at ensuring their funding for their next re-election bid. As such, they are not a good source of evidence for this matter—because of the influence of bias.
From a rational standpoint, the most sensible approach would be to find what the majority of qualified experts in the field believe about the matter, taking into account the influence of possible biases. That is, to use a standard argument from authority. A 2012 survey shows that 35% of economists think that tax cuts do increase growth. About 35% were uncertain. A mere 8% disagreed.
Economists, unlike most politicians, can consider nuanced plans. Interestingly, the general consensus is that certain tax cuts, combined with certain spending cuts can boost economic growth and increase employment. Interestingly, there is strong support that tax cuts for the bottom 90% of income earners does increase employment and create jobs. This is not surprising. According to Senator Charles Grassley, there are people who invest and those who are “spending every darn penny they have, whether it’s on booze or women or movies.” While Grassley’s point was that the investors should be rewarded for their investing by getting rid of the estate tax (which only impacts singles with estates of more than $5.5 million and couples with estates of more than $11 million), he is right to point out that there are people who spend on such things as movies and booze. This spending creates jobs for people who create and sell these things. So, if the lower income spenders have their taxes cut, they will spend more “darn pennies” and improve the economy. Tax cuts aimed at the bottom 90% of income earners would thus be a boon to the economy by getting more money directly into the economy. In contrast, the trickle-down approach seems to have never worked. As such, it is tax cuts for the rest of us that would grow the economy, not tax cuts for the top earners.
But, it can be argued, tax cuts for businesses would surely pay off in more jobs. With lower taxes, companies would have more money and they would then hire more people. While this seems to make sense, what is needed is actual evidence that companies would, in fact, plow that tax cut money into more jobs.
Interestingly enough, while the Republican party was trying hard to sell tax cuts as a means of increasing employment and wages, businesses have been candid about how they will respond to such a tax cut. While some have claimed that they will invest in growth, they seem to mostly have planned to do that already. In general, most companies seem unlikely to convert tax cuts into increased employment or employee wages. This makes sense because companies, in general, are already doing quite well.
One of the main arguments against the claim that a tax cut for companies will result in increased employment and better wages is because companies are already doing extremely well. Since 2007, companies have been enjoying excellent post tax profits but they have not been matching this increase in profits with increased investment. Superstar companies, like Apple, are flush with cash and yet do not use that cash to increase employment or raise wages. As has been often pointed out, it is a time of record profits but stagnant wages for the workers.
If companies are already enjoying high post-tax profits but are not investing or increasing wages, then there is no reason to think that a tax cut will suddenly spur them into action. To use an analogy, if I have piles of extra money but I am not using it to improve my house, then it would be rather odd to claim that if I was given a tax cut I would suddenly engage in home improvements. After all, I already have the money to make improvements and would do so if that was what I wanted to do.
But, perhaps the argument is that if companies had even more money then they would suddenly be motivated to increase their investment, hiring and wages. Going back to my analogy, the argument would be that even if I could easily afford the improvements I would be pushed into making those improvements once I had somewhat more money. While not impossible, this seems rather odd. A better explanation is that the companies are not interested in increasing wages, investing more or hiring more people. Likewise, the best explanation as to why I do not spend on new home improvements I can easily afford is not that I am waiting for a tax cut but that I have no interest in those home improvements.
Now, if companies were short on cash, then this sort of argument would make more sense—assuming that there is evidence companies wanted to invest more, pay more, and hire more people and were hampered by a lack of money. Going back to the analogy, if there were good reasons to believe that I wanted to make home improvements but merely lacked the funds, then it would make sense to argue that a tax cut that would allow me to afford the improvements would spur me to make those improvements. But, if I am sitting on stacks of cash and not making home improvements, the best explanation is that I do not want to make those improvements and giving me a tax cut would not change things.