Why Tax Cuts Don’t—and Won’t—Create Jobs

Jack Rasmus

Last Fri­day, Decem­ber 3, the U.S. Depart­ment of Labor announced that the unem­ploy­ment rate had risen once again. A full three years after the cur­rent reces­sion began in Decem­ber 2007 there is no end in sight as to when the jobs mar­kets will recov­er. This is in stark con­trast to the full recov­ery of cor­po­rate prof­its and bankers bonus­es, now back rough­ly to where they were in 2006-07, accord­ing to U.S. gov­ern­ment data.

Banks now have a hoard of cash reserves of more than a tril­lion dol­lars, accord­ing to the busi­ness press. How­ev­er, as U.S. Fed­er­al Reserve Bank data show, as the biggest 19 U.S. banks recov­ered in 2009 – 2010, their lend­ing to small and medi­um busi­ness­es declined steadi­ly. Nor has that lend­ing recov­ered in 2010. With­out bank lend­ing to small busi­ness­es — the main engine of job cre­ation in the U.S. — there can be no job cre­ation.

Sim­i­lar­ly the largest com­pa­nies, the S&P 500 non-bank cor­po­ra­tions, are also sit­ting on a hoard of cash. At last esti­mates, an amount of $1.84 tril­lion in liq­uid assets, accord­ing to the Finan­cial Times busi­ness dai­ly.

So with all that cash, why aren’t banks lend­ing and big com­pa­nies invest­ing and cre­at­ing jobs, one might ask?

The even more impor­tant ques­tion is: if banks and busi­ness­es have that record hoard of cash on hand why should their tax­es be cut, in effect increas­ing even more that hoard of cash that isn’t being invest­ed? Won’t they just con­tin­ue to hoard the tax cut too?

The idea that cut­ting busi­ness and wealthy investors’ tax­es orig­i­nat­ed in 1961 with then Pres­i­dent John F. Kennedy. But at that time busi­ness invest­ment tax cuts were tied to proven job cre­ation. Busi­ness­es had to prove they added jobs before they could claim the tax cut. That was changed with Rea­gan. Now busi­ness­es could get the tax cred­its even if they didn’t cre­ate jobs. Their tax­es were cut even if it meant they reduced jobs. By the time of George W. Bush, busi­ness­es could claim tax cuts for invest­ments made off­shore. GM cut hun­dreds of thou­sands of jobs in the U.S. while adding thou­sands in Chi­na. Ford cut jobs while adding them in St. Peters­burg, Rus­sia. Cor­po­ra­tions could claim the invest­ment tax cuts, even if jobs were cre­at­ed off­shore and simul­ta­ne­ous­ly elim­i­nat­ed in the U.S. In effect, U.S. tax­pay­ers were pay­ing US cor­po­ra­tions to send their jobs over­seas.

Between 2001 – 2004 George W. Bush pushed through a series of annu­al tax cuts for investors and cor­po­ra­tions that amount­ed to a total of $3.4 tril­lion over the recent decade, accord­ing to the Cen­ter on Bud­get and Pol­i­cy Pri­or­i­ties. Every tax cut bill passed between 2001 – 2004 was called a jobs cre­ation bill. More than 80% of the $3.4 tril­lion even­tu­al­ly accrued to the wealth­i­est 20% of house­holds and cor­po­ra­tions, and most of that to the top 0.1%, or 100,000 house­holds, and the S&P’s largest com­pa­nies. And what did George W. Bush’s busi­ness-investor tax cut pro­duce in terms of jobs? The peri­od 2001 – 2004 wit­nessed the weak­est jobs cre­ation on record fol­low­ing a reces­sion. It took a full 46 months just to recov­er the lev­el of jobs in the U.S. that exist­ed in Jan­u­ary 2001, when the reces­sion began. Esti­mates today after the cur­rent reces­sion are that it will take 7 – 8 years to recov­er the lost jobs, if even then.

Anoth­er, more recent test of the busi­ness tax cuts cre­ate jobs” idea hap­pened in the spring of 2008. Bush and Con­gress passed a $168 bil­lion stim­u­lus bill as the reces­sion of 2007 – 2010 began to deep­en. About $90 bil­lion of that com­prised tax cuts. What jobs did it cre­ate? None. The jobs mar­ket col­lapsed in the sec­ond half of 2008 at a rate of near­ly one mil­lion a month for six months, a rate of job loss that rough­ly par­al­leled that of 1929 – 30.

The Oba­ma stim­u­lus bill of 2009 is yet anoth­er exam­ple of why tax cuts in gen­er­al, and busi­ness-investor tax cuts in par­tic­u­lar, do not cre­ate jobs. Of Obama’s orig­i­nal $787 bil­lion stim­u­lus passed in Feb­ru­ary 2009, about half were tax cuts and more than $225 bil­lion were specif­i­cal­ly busi­ness-investor cuts. Twen­ty months lat­er we have vir­tu­al­ly no net job cre­ation. Pri­vate employ­ers have cre­at­ed about 900,000 jobs in 2010, the major­i­ty of which are part time or tem­po­rary jobs. For its part, the fed­er­al gov­ern­ment has cre­at­ed no net new jobs since Oba­ma came into office, while State and Local gov­ern­ment have laid off hun­dreds of thou­sands over the past year and even more cuts are planned for 2011. The U.S. Labor Department’s most con­ser­v­a­tive esti­mate of unem­ploy­ment (called the U‑3’ sta­tis­tic) today is 9.8% and 15.1 mil­lion job­less. The Labor Department’s more accu­rate esti­mate (called the U‑6’ sta­tis­tic) today is 17.0% and rough­ly 23 mil­lion job­less.

So what did John Q. Tax­pay­er get for all that tax cut­ting? Cer­tain­ly not jobs, but instead a huge deficit bill now com­ing due. Nonethe­less, the debates in Wash­ing­ton now still focus on more tax cuts in 2011. So long as that’s the focus, the U.S. unem­ploy­ment sit­u­a­tion will con­tin­ue to stag­nate or worsen.

Jack Ras­mus is the author of Epic Reces­sion: Pre­lude to Glob­al Depres­sion, pub­lished in May 2010 by Plu­to Press, Palgrave-Macmillan.

Jack Ras­mus, pro­fes­sor of eco­nom­ics and polit­i­cal econ­o­my at San­ta Clara Uni­ver­si­ty and St. Marys Col­lege, is author of Epic Reces­sion: Pre­lude to Glob­al Depres­sion, and The War at Home: The Cor­po­rate Offen­sive From Ronald Rea­gan to George W. Bush. His forth­com­ing book (2011) is Obama’s Econ­o­my: Why Recov­ery Failed. What’s Next? Ras­mus has pub­lished numer­ous arti­cles in Z mag­a­zine, Cri­tique, Amand­la, Against the Cur­rent, the Dis­patch­er and oth­er periodicals.
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