Laudato Si
It is a common contention among conservatives that low taxes create jobs. Classic trickle down economics at its simplest. Meanwhile, liberals look at the Bush tax cuts and say that it isn’t true. Both sides are partially correct, but it is where they are incorrect that it matters. I don’t have much time to dispel the fallacy (I mean to put in 10 hours of studying today), but very briefly and basically I will try…
True job creation cannot be done by the government, because any job that is created by the government must be created by money collected via taxes (and is therefore a net loss – a loss by the way, that rarely, if ever, results in “success” as defined in the market: the ability to turn profit. Examples? Post office, DMV, Social Security, and virtually any government projects – roads, buildings, etc. – when compared to similar projects undertaken in the free market). This means that it is created at the expense of the capital of the private market, which produces the wealth we all enjoy (the tax money being the yield of it). Since the government’s job “creation” relies on wealth taken from other sources, the jobs created are not really a benefit to the economy (overwhelmingly commonly they detract from it). If the government cannot create jobs, that leaves one entity that can: the private market. This means that entrepreneurs (as individuals) must create jobs. In order for jobs to be created though, two conditions need to be present to facilitate the individual’s creation of a job: the capital to do so and the freedom to do so. Each condition is by itself necessary, but not sufficient to job creation. The capital element (having the money to spare such that you may employ a new employee) is the aspect of contention with the fallacy above. It is correct that the more taxes that are collected, the less capital will be available to create jobs – especially in an already weak economy. But that is not the satisfaction of both above necessary conditions needed to create jobs. You also need the freedom to create the job, which entails at least two other factors, in my estimation. The first is freedom from regulatory apparatus. Steep barriers to entry or job creation obviously will deter a businessman from creating a job, even if he has the capital to do so. If this becomes a problem, job creation will not take place. The second is the concept of regime uncertainty, which I spoke of a few days ago. Regime uncertainty is the idea that when an entrepreneur cannot determine what taxes will be increased, what new regulations will be set up as barriers to entry or profit, or which way the government’s policies will push the economy, he is very commonly going to forgo the opportunity to expand his business in any fashion (creating jobs, for example). If wealth that you own as a businessman is more apt to being wiped out by new taxes or a downturn in the economy from a new spending plan, you will be much more likely to save your money than to spend it (even carefully), risking it being destroyed by governmental intervention or economic instability. These elements of the “freedom” aspect are noticeably missing in this economy. Barriers to entry are higher than ever. Inflation is just heating up. Taxes on businesses are likely to be raised. The Obama Administration, with the Congress in tow, is generally unfriendly to natural economic growth, preferring instead to “stimulate.” It is true that tax rates are low, as well as revenues (which Hauser’s Law shows is not due to the rates at which people are taxed, but rather the conditions of the economy: more income to more people = more income that can be taxed). But low taxes do not of themselves create jobs. That is only one factor, and though a man who has lots of spare capital may be free to create a job under heavy taxation, increasing taxes will tie up more taxes and ensure that less capital is free within the system for expansion of the economy for most people, whose free capital is only just enough to create jobs.
The fallacy arises on both sides by the same themes and undercurrents that pervade modern neo-liberal economics altogether (which are espoused by both parties). Keynesianism and Statism in general hold the population to be naught but a mass, an automaton or stimulus-response machine subject to direction by government intervention. Republicans DO believe that low taxes will necessarily create jobs (of course both parties believe beyond evidence, but that is neither here nor there), because they believe that the whole of society can be coaxed into acting a certain way under certain conditions. The view fails to account for human choices and freedom, just as the neo-liberal Democrat’s QE2 (the third of which heading our way, said Bernanke today) failed to produce the results that they believed would occur (a lowering of unemployment, significant stock market rallies, etc). People cannot be predicted or programmed in such a way, which is a major argument in itself against a centralized economy. Remember that Bernanke stated unequivocally “I don’t know,” the other day when asked why QE2 wasn’t stimulating how the Federal Reserve Board and Obama Administration predicted (He even said it again today). He really doesn’t know, despite all of his education and the appearance of confidence he exudes. He can’t understand why people cannot be tricked into spending money (don’t even get me started on the materialism necessitated by Keynesianism, since spending is the only measure of an economy’s strength…), even when unprecedented amounts of liquidity (generally, spare cash given to banks such that they may extend more loans) have been injected into the economy. The answer is human choice, and God-given free will. And still government-sponsored behaviorism continues, on both sides of the aisle…
The fallacy pushed by conservatives, should be “Low taxes are conducive to the creation of jobs.” Not as catchy, is it? Even so, when you hear a proponent of neo-liberal economics saying “Low taxes do not help create jobs!” it may be appropriate for you to ask “and how does taking money out of the market [via taxes] create jobs?” since that is the implication of their side of the argument (which fails to take into account the fact that for every dollar taken out of the economy and put to some government program [that is probably wasteful], the economy necessarily suffers the loss of a dollar that could have been given to the promotion of efficiency, consumer choice, and greater production). See if they can come up with some confounded & half-true theory. If they can, they are a good liar. That, or they don’t understand the basics.
I hope that explanation suffices. Let me know if I missed something or it is explained poorly…