Archive for June, 2012

Rich People, Rich Companies, Rich Government, and Jobs

June 15, 2012

There’s a peculiar dichotomy in the discussion on “the rich” creating more jobs by getting tax cuts.

When we talk about the wealthy, we have to be aware that “taxation on the rich” takes two very different paths; one is regarding tax upon the upper-level management that’s getting paid in millions of dollars regardless of the performance of the company. The other is tax on corporate profits.

Clearly, if an individual is sitting on a pile of cash, then there is no job creation going on there. If the money is invested in stocks, it’s accomplished little more than raising that stock’s artificial value for someone else. This is not job creation. Two stock owners can buy and sell stock back and forth until the stocks have doubled in price. All they’ve succeeded in doing is tying up their profits in inflated stock prices. When the stock market is doing great, cash is being tied up to inflate the prices; this cash is not creating jobs.

Likewise, the concern about taxing profits on companies is totally irrelevant if the company is actually using their extra money to create jobs. in which case their profits will be very small and they will pay very few taxes.  If you think about it, high corporate taxes could, in fact, encourage corporations to reinvest heavily in themselves and in job creation – they maintain corporate growth, new jobs, and thus investors to jack up their own stock prices.

But if we look back over the last thirty years, the tax on the wealthy has been lower than ever so there’s been less of an incentive to dodge taxes by reinvesting in job growth without the company. The job situation is worse than ever. The government, collecting less money, has the worst deficit problem ever, escalating every year for the last 30 years or so (excepting Clinton’s time in office – we can only assume he raised taxes). The jobs that the government created by taxing the wealthy went away with their tax cuts.

Contrary to conservative beliefs, lowering taxes eliminates jobs. The government tends to spend ALL of the money they bring in, as everyone has noticed, and when they spend it, they create jobs.

So if CEOs have a pile of cash to burn, what are their choices? Sit on the cash, that’s an option. Invest in stocks, inflate stock prices, thus tying up the cash? Or expand their companies.

Expanding their companies only makes sense if there’s a demand. So in a depression or recession, there’s zero incentive, no matter how low you make their taxes, to invest in creating jobs. Think about it…put yourself in the CEO’s position. It’s pretty simple math.

So what options are we left with in  a recession? Tax breaks for the rich…no, that clearly doesn’t work. Compare unemployment when peak tax rates were  90% to current times. Pretty obvious, isn’t it? And if the government has this tax money, what do you think they’ll do with it? Put in in stocks, spend it in China on cheap labor, or make jobs for Americans?