The Big Lie About Jobs and Taxes

The question of whether to extend the Bush tax cuts seems hopelessly mired in misinformation. The bickering in Washington on the economy seems almost exclusively focused on the top marginal tax rates — the rate paid by the wealthiest taxpayers on the income that falls into their highest tax bracket. The little mentioned fact is that everyone, including millionaires and billionaires, pays income taxes at the same marginal tax rates.

To begin with, we all pay taxes only on “taxable income.” That means we all get personal exemptions for dependents, itemized deductions or the standard deduction, and any applicable tax credits or preferences. We then pay taxes on the “taxable income” that’s left, and we all pay taxes at the same marginal rates on our taxable income.

Using married, filing jointly as an example, we will all for the tax year 2010 pay:
10 percent on the first $16,500 in taxable income,
15 percent on the amount over $16,750 up to $68,000,
25 percent on the amount over $68,000 up to $137,300,
28 percent on the amount over $137,300 up to $209,250,
33 percent on the amount over $209,250 up to $373,650, and
35 percent for all taxable income over $373,650.

The Obama administration’s proposed repeal of the Bush tax cuts would mean marginal rates would be increased for the portion of taxable income above $200,000 for individuals and $250,000 for families. The proposed increases would be from 33 percent to 36 percent, and from 35 percent to 39.6 percent, for the two highest tax brackets.

When you look at this proposed increase in marginal rates on taxable income, the thing we need to understand is that, in relative terms, all of these rates are quite low historically. Back in 1913, when the income tax was first proposed, the highest marginal tax rate was initially only 7 percent. This was quickly raised to 15 percent in 1916, and then escalated rapidly to a top rate of 77 percent in 1918.

During the 1920s, the top rate was reduced back down to 25 percent for income above $100,000 and stayed at that lower rate through the Stock Market Crash of 1929 and into the early 1930s. President Roosevelt increased spending and raised marginal tax rates in 1932 including marginal rates of 56 percent to 63 percent for income above $100,000. Tax rates remained high through World War II, peaking at 94 percent in 1944 for taxable income above $200,000.

Rates remained high until President Kennedy lowered marginal tax rates to 70 percent on income over $200,000 for married couples and $100,000 for individuals. Tax rates remained at this level until President Reagan lowered them during the 1980s. By the end of his second term, Reagan had lowered the highest marginal tax rates to 33 percent. President Clinton raised the top rates back up to 36 and 39.6 percent for the top two tax brackets, and President George W. Bush lowered these top two brackets back down to 33 and 35 percent where they remain today.

What’s important to note is that marginal tax rates have had little to do with the economic well being of the American people. Low marginal tax rates did nothing to head off the Great Depression, and top rates ranged from 70 to 92 percent during what was considered the golden age of American capitalism from the end of World War II until the early 1970s.

President Kennedy was credited with spurring economic growth in the 1960s by lowering rates and his example was frequently cited during the Reagan and George W. Bush years to justify further reductions in marginal tax rates. The correlation between these most recent reductions in marginal rates and economic growth is tenuous at best, especially the cuts by Reagan in his second term and those of George W. Bush. Reagan and Bush tax cuts did very little to promote economic growth — what they did accomplish was an upward spiral of US national debt.

In the context of current economic conditions, the greatest threats to economic growth are not small increases in the top marginal tax rates. Businesses large and small do not hire more workers in response to small changes in marginal tax rates. They hire workers to expand their businesses in response to increased demand for the goods and services they produce. And both businesses and individuals need access to capital to invest and spend.

Businesses and individuals reduced spending starting in 2008 as the stock market tanked and the housing bubble burst. The federal government stepped in to prop up demand and restore liquidity to the capital markets without which we would likely have experienced a depression as bad or worse that the Great Depression of the 1930s.

The American economy is growing again but with anemic demand for goods and services and the resulting job creation has been very slow — too slow to put many millions of Americans back to work. Putting Americans to work will ultimately increase the demand for goods and services as millions re-enter the workforce and is the only way to get the American economy back on track.

There is a recent precedent for raising marginal tax rates in circumstances like we face today. President Clinton in 1993 raised the top marginal rate from 33 percent by creating two new 36 percent and 39.6 percent tax brackets, while at the same time constraining the growth of federal spending. Constrained growth in federal spending, and increases in federal revenues slowly lowered the federal deficit and the federal claim on capital in the capital markets. This led to a decade of prosperity that produced 22 million jobs, actual federal budget surpluses, and future year budget surplus projections in the trillions of dollars. Reducing the government’s share of available capital meant more capital available for businesses and individuals.

The big lie on jobs and taxes is that lower marginal tax rates on the wealthiest Americans create jobs. They don’t. Macroeconomic policy, both monetary and fiscal, are the only tools we have found that can be used to steer a capitalist economy. Which leaves us with the conclusion that all those who today focus on keeping the Bush-era marginal tax rates must have a different agenda than what’s good for the American economy and the American people.

A purposeful and ideologically-based interest in defunding the federal government is one explanation. Self-interest is another. The problem is that in the long run an American economy saddled with both public and private debt won’t have the capital to invest and compete in a growing world economy. The tax-rate hawks are engaged in a very short-sighted and unenlightened view of self-interest.

The very real threat we face in the world economy can’t be fixed by tinkering with marginal tax rates. We can only position ourselves for success the old fashioned way — by spending less on what we don’t need, and getting out of debt while saving and investing for the future. Government can and must lead the way by curbing unnecessary spending and raising sufficient revenues to balance its books over time, meet the needs of the less fortunate, pay for what the American people need to live comfortably and securely, and invest for our nation’s future.

Jonathan Cykman, Basic PLUS Author

About cykman

Jon Cykman works in Washington, DC as a consultant, and is long-time student of American Politics. He started out handing out campaign materials for Hubert Humphrey during the campaign of 1968, and later went on to earn a B.A. in Political Science from the State University of New York, College at Purchase in 1978, and an M.A. in Public Affairs from the University of Texas, Lyndon B. Johnson School of Public Affairs in 1980. Jon retired from Federal Service after 31 years of service, and lives with his family in Catonsville, MD.
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5 Responses to The Big Lie About Jobs and Taxes

  1. hoboduke says:

    Taxes don’t create jobs, or stop jobs. Jobs are created by business operations that need people to make money. However, strangling business regulations through conflicting regulatory agencies staffed by faceless bureacrats does kill business job creation. Nobody dares question why farms go without water due to one government agency, and why government subsidies to corporations creates false profits by use of tax dollars. Nobody rich really worries about taxes. We should worry about our debt carried on the backs of us and our grandchildren. Nobody dares reduce spending, or consider the option of firing 10% of governments staff expenses nationwide.

    • joncykman says:

      Seems like we agree on the main subject of this post – that taxes don’t have much in the way of an impact on jobs. And I share your concerns about some of the seemingly mindless regulations that emanate from all levels of government — state, local and federal. What I’d like you consider is that those faceless bureaucrats you berate are not the civil servants who would get the ax if you reduced federal employment. The regulatory problem you raise results from politicians and lobbyists who set policy on behalf of special interests — the very same special interests who finance political campaigns and buy elections. You have not provided enough detail on your two examples — concerning water rights and government subsidies to corporations — but I can pretty guarantee you that these were not regulations intended to serve a public good. From day one they likely resulted from the fox being in charge of the chicken coop — from special interests establishing policies and regulations that serve their interests alone. Federal financing of elections and transparency when lobbyists are put into regulatory-setting jobs would be helpful.

      The issue of federal employee cuts may also not be as you think it is. Given the current role of the federal government, it’s very clear that we don’t have enough federal employees, or at least enough good ones, to protect the interests of taxpayers. Federal contractors rip off the taxpayers everywhere you look — and the reason is that we don’t have enough good feds to keep them honest. Going after federal employees and subjecting them to cuts at this point will only discourage good, competent feds from seeking or remaining in federal employment. Poor performance by federal agencies then becomes a self-fulfilling prophecy.

      • hoboduke says:

        I endorse, let’s adopt a federal employee program! Spend a day being the shadow of the breathless, and exhausting workload of these unsung hero workers. That may convince you how your tax money is being wasted.
        The usual scare tactic thrown up as a defense is; “How can we fire nuclear safety inspectors? How can we fire mining safety inspectors?” For every one actually doing an important function, we have 10 creating reports that nobody reads with new regulations to keep them busy.

        • joncykman says:

          You have a point there but I’d state it a little differently. For every one fed doing an important job for the American taxpayers, we have two or three stuck in mindless red tape and bureaucratic processes that are the creation of politicians paid for by special interests, and high level political appointees who are the cronies of those politicians. It’s where the phrase “Brownie, you’re doing a heck of a job” came from.

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