Following up a bit on the simplified version of tax policy offered below, I want to highlight Master Krugman (why isn’t this guy on Obama’s payroll already?):
The point is that nobody really believes that a dollar of tax cuts is always better than a dollar of public spending. Meanwhile, it’s clear that when it comes to economic stimulus, public spending provides much more bang for the buck than tax cuts — and therefore costs less per job created (see the previous fraudulent argument) — because a large fraction of any tax cut will simply be saved.
This suggests that public spending rather than tax cuts should be the core of any stimulus plan. But rather than accept that implication, conservatives take refuge in a nonsensical argument against public spending in general.
As some have pointed out, this is not strictly true, and every single Republican I’ve seen on the TV machine over the past few days has made a point of contradicting this very thesis, somewhat muddling Krugmans assumption. Clearly, liberals need to get on TV a bit more and set the record straight.
A big part of the problem is that no one ever publically explains this stuff through, in terms everyone can grasp – it’s either the Dick Army chanting in unison that “everyone” knows that tax cuts create jobs while Wolfie nods along or…what? Paul Krugman four days ago in the pages of the NY Times patiently stating the opposite?
To get some idea on why the Nobel Prize winner is right, and why Democrats should be swarming the airwaves shouting these maniacs down, lets “follow the money” through the two scenarios and see which will actually create more jobs.
To get an idea of what a Republican wet-dream stimulus looks like, let’s just steal this actual summary of the alternate plan the House Gop actually offered:
1) a permanent 5% tax cut in all marginal income tax levels 2) cut the corporate tax rate from 35% to 25% 3) no extra spending and no earmarks 4) make the dividend and capital gains tax of 15% permanent 5) repeal the AMT permanently 6) repeal mandatory withdrawals from IRA’s at 70 years of age 7) make all withdrawals from IRA’s tax free in 2009.
This is a complicated stew of a ’stimulus,’ but one thing it absolutely does across the board is restrict the flow of revenue toward the Federal Government, in other words, it is the most passive position possible for the Government to take, making it the responsibility of each tax-break recipient to do something with that money to get the economy moving.
This will be an admittedly flawed and unscientific thought experiment, done by someone with absolutely no econ training – in other words, it will be at least 250x as autoritative as anything coming out of GOP congressional mouths – but here we go: let’s track a mythical $200,000,000 (200M) of ’stimulus’ under the respective GOP and Obama plans, and see if we can deduce which one actually creates jobs and stimulates the economy.
First, let’s say we have ten of each type of taxpayer covered under one of the provisions of the GOP plan – ten taxpayers from the exact top of each income bracket, in the top bracket we have ten taxpayers whose taxable income is exactly $1M, we have ten taxpayers with no taxable wages, but $1M in capital gains, ten 70 year-olds with $1M in IRA assets, and another ten with the same portfolio who are 69. We also have one large-cap corporation to pay the corporate tax part of the bill (I’m actually going to ignore the AMT part, becuase it’s just too complicated, although it would be relief to many upper-middle taxpayers).
After we add up all the tax savings of the individuals in sections 1, 4, 6 and 7, we get around $5,000,000; so we’ll have to surmise our corporation has $1.5 billion in taxable revenue, and that its’ 10% cut will make up the other $15 million of our hypothetical $200M of ’stimulus.’
So how does all this non-spending and non-taxing create jobs and how many jobs does it create? It’s not readily obvious because it all depends on this ‘trickle down’ stuff. Of the $5M coming from our individual taxpayers, almost none of that will result in the creation of jobs directly. Our taxpayers in the lower brackets will use the excess money to live and pay rent or mortgage, which may result in a short term flow of money, but if the wolf is at the door it may only stave him off for a month or two. Those in the higher income brackets and those that take advantage of the temporary window to move all their IRA savings into other accounts without paying taxes will probably invest or re-invest that money, at least in the short term. This may keep their stockbrokers employed for a bit longer, so that’s a plus. Companies whose stock remain stable thanks to this injection of investment capitol may remain viable for a bit longer, but the price of a companies stock or it’s volatility doesn’t tell us anything about how many jobs they might create.
So let’s say that all of our lower earners’ money goes back into circulation immediately, paying rent, buying things and slowly working its way through the economy. But that’s only about $20,000 total, so at most we’re talking about one low-paying job saved. Of the rest, maybe 10% will make its way into the economy directly through brokerage fees and retiree’s living off some of this income. That’s another $50k, or perhaps one middle class job. The rest, or over $400K of that $500K, will continue to be invested across a wide range of instruments, and whether that money is used to actually create jobs has alot to do with how the economy in general is doing. We’ll pull a number out of our ass for the sake of argument and say that enough of that money is invested in such a way that we get one more job during the next year out of revenue created by this money.
That’s $500,000 of not-taxes, indirectly creating three jobs.
Clearly, our corporation had better do some hiring with that $250M they’re not paying to the government. But will they? That kinda depends on what kind of corporation we’re talking about. If our model corp is a bank, for instance, history teaches us they will just pay all their executives bonus’ and call it day. This will have the effect of keeping a couple of New York decorators and antique dealers in business for the year, as well as their real-estate brokers. We’ll call it 10 jobs, not counting all the jobs cut after the bank is taken over by the Fed.
If our company actually builds things, say construction equipment, then I’m sure the money will come in handy, but, unless there is demand for their stuff and the forecast for a healthy future expansion, there is little guarantee that there will actually be any jobs created. If no one is building anything, and no one wants to buy their tractors, then an extra $250M probably wouldn’t even stop them from firing the workers they don’t already need much less create new jobs. They also won’t spent that money ordering steel to build equipment that they won’t build, so there is no guarantee of trickle-down either. In other words, in a good economy, with orders pouring in, our company might use that extra tax money to invest in building another plant (though more likely they’d just pay out higher dividends to some of our taxpayers above), but in a bad economy, such as the one we find ourselves in, no company in the world would use the money to keep or hire workers it didn’t need (unless, as noted, it’s a bank paying executives.)
At the end of the day, we’ve ’spent’ $200,000,000 and we really can’t know how many jobs that were really created or saved. Maybe three, maybe three-hundred. We can’t know ahead of time, we can’t really quantify it, and the current actual state of the economy has quite a bit to do with how successful any of it is. GOP talking heads are LYING when they say that tax-breaks create jobs because there is no actual creating of anything, anywhere – only movement of money with the possibility of investment, but no guarantee.
Keep in mind that this is all deficet spending by the government, even if they/we don’t get anything out of it. That is, because ALL of this ’stimulus’ comes in the form of taxes not being payed, if we intend to keep funding whatever programs got this money at current levels, the Feds have to borrow this money, to be paid back with interest by future generations TBD.
For our counter-example (and I’m sure you all saw this coming), let’s examine the $200,000,000 in direct spending to fix the National Mall (a provision which Obama caved under pressure from House Republicans).
First of all, would we have to borrow it, paying interest and passing along this debt to our children’s childrens’ children? Yes, considering we are still running a budget deficit and that this is an emergency spending measure, but no in that we will still be collecting this amount from all our taxpayers above, and so won’t have to go into extra debt paying for the services that their tax-cuts would’ve de-funded. So, yes.
How many jobs? Let’s just say this is a two-year project to restore, beautify and manage the parks around the mall. We have to hire landscape architects, who hire draftsmen to draw up plans; engineers to do any major facility upgrades; construction contractors, who hire lots and lots of laborers and landscapers to do the actual work, order equipment like tractors from our big corporation above, who in turn builds that plant they were thinking about and orders steel to make the tractor to send to the guys on the Mall – if just 40% of that sum goes directly into hiring people to forge steel, build tractors, design and construction, then that $80M could create perhaps 13,000 jobs!
Bottom line: GOP tax cuts = 13 jobs. Democratic stimulus = 13,000 jobs.
And we’d have a really really nice park to take our grandchildren to.
