Another Study Shows Tax Cuts =/= Jobs

Here’s another study that shows that one of the central ideological arguments of conservatives and Republicans, that tax cuts are the key to spurring job growth, is false. The Center on Budget and Policy Priorities tracked the effects of state tax cuts in the 90s and found that the states that cut taxes had less than one-third the job growth of states that did not.

Policymakers in a number of states including Arkansas, Kansas, Missouri, North Carolina, Ohio, and Wisconsin are promoting deep cuts in personal income taxes as a prescription for economic growth — an approach that has not worked particularly well in the past and is not supported by the preponderance of the relevant academic literature.

States that enacted major personal income tax cuts in the 2000s, before the most recent recession hit, were as likely to lose economic ground as to gain it.

* Of the six states that enacted large personal income tax cuts in the years before the recession, three states saw their economies grow more slowly than the nation’s in subsequent years, and the other three saw their economies grow more quickly.

* The three that grew quickly are all major oil-producing states that benefitted from a sharp rise in oil prices in the years after they implemented their tax cuts. In other words, all of the lesser- and non-oil-producing states that enacted big personal income tax cuts in the 2000s grew more slowly than the national average.

Similarly, the biggest tax cutting states of the 1990s — all of which enacted substantial personal income tax cuts — also did not perform particularly well in later years.

* States with the biggest 1990s tax cuts grew jobs during the next economic cycle at an average rate one-third the rate of states that were more cautious.

* The biggest tax-cutting states also had slower income growth. In none of these states did personal income growth in the next economic cycle exceed inflation.

The same thing is true on the national level. Tax cuts are not usually followed by a surge in economic growth or jobs and this has been true for the last 60 years. Yet this is one of the most fundamental beliefs of every conservative.

37 comments on this post.
  1. fastlane:

    Oooh, more data. I wonder of those ‘Republicans for Reason’ will see this?

  2. Raging Bee:

    …Yet this is one of the most fundamental beliefs of every conservative.

    This is what happens when an ideology becomes a religious belief.

  3. raven:

    After Bush cut taxes, deficits went way up and the unemployment rate during the Great Recession was 10%.

    Supply side economics is a lot like the Flat Earth, Geocentrism, and creationism. And believed by the same groups.

  4. Rob F:

    To be fair, most (~90%) economists agree (possibly with provisos) that “Fiscal policy (e.g. tax cut and/or government expenditure increase) has a significant stimulative impact in a less than fully employed economy”. In other words, it is certainly possible that situations exist where a tax cut would stimulate and grow the economy.

    Let’s do an exercise. You will need five coins/tokens (of any denomination; they don’t have to be identical, but for the purposes of this exercise we’ll assume they are identical) and two drinking glasses/cups that must be readily distinguishable.

    Now, put the two glasses on the table. Pretend they are the only two provinces/states/national subdivisions. Put two coins in each (you should have one left over). Now, let’s suppose that the premier of one province wants to increase the number of jobs in their province. There are two ways to do this:

    One way is to increase the number of jobs in their province. You can simulate this by putting in one coin into either cup. In this case, considering the country as a whole, you’ve now increased the number of jobs (there are three in one and two in the other, for a total of five in the country).

    Remove the excess coin from the cup with three. Now there should be two coins in each cup again.

    Another way to do this is, instead, to induce some company to leave one province and relocate across the border. You can simulate this by taking one coin out of one cup, and putting it in the other. There should now be three coins in one cup and one coin in the other. Locally, the effects in one cup are the same (there are three coins) but globally they are different (five coins versus four). In effect, this second way did not actually “create jobs”, only redistribute them. And when politicians or races to the bottom include rhetoric about “creating jobs”, in most cases what it really is is merely some big business (not small businesses, which create the most jobs) moving from one location to another, redistributing jobs in the process. Nationally, this does not actually “create” jobs.

    Redistributing jobs is a lot harder to do internationally (amongst other reasons, several countries have a significant cost advantage in labour).

  5. doublereed:

    This doesn’t matter at all. The idea of tax cuts = job growth has never been based on empirical evidence, ever. Providing more empirical evidence to somebody who doesn’t value empirical evidence is a waste of time. First, you have to convince them that evidence is a good thing.

    They are ideologically opposed to the idea that government can do good things for the economy. That’s all there is to it.

  6. Raging Bee:

    Let’s do an exercise. You will need five coins/tokens (of any denomination; they don’t have to be identical, but for the purposes of this exercise we’ll assume they are identical) and two drinking glasses/cups that must be readily distinguishable.

    Sounds like we’re playing quarters in an economics class. Hope you got a good brand of beer…

  7. fifthdentist:

    @ Raging Bee,
    Sounds more like the variation we played in college called “speed quarters” with lots of quarters flying at the same time.
    I remember nothing about how we played it, which probably is a good thing.

  8. unbound:

    Don’t really need a study to know that tax cuts do absolutely zero to spur the economy.

    I have never hired someone because my company made more profit. And that is all a tax cut will do…increase profits. I hire to replace someone who has left, or I have new work (which also has zero to do with tax cuts), or hiring someone keep a loss in check (e.g. cheaper to pay someone than to deal with lost business).

    The issue that Rob F points to above is just plain foolish. You can’t cut tax rates enough to spur competition to come back to the states from China, India, etc. And I seriously doubt ~90% of economists actually believe that it is that simple (although I do imagine they describe such a simplistic scenario to get their students to think about alternatives).

    Let me tell you what is actually trickling down to the masses from the rich, it is yellow and doesn’t smell good…

  9. raven:

    To be fair, most (~90%) economists agree (possibly with provisos) that “Fiscal policy (e.g. tax cut and/or government expenditure increase) has a significant stimulative impact in a less than fully employed economy”. In other words, it is certainly possible that situations exist where a tax cut would stimulate and grow the economy.

    it is certainly possible that situations exist where a tax cut would stimulate and grow the economy.

    Those situations are very rare. Which virtually all economists also know.

    We just did that experiment with the Bush tax cuts. It didn’t work.

    Deficits are at record highs, unemployment peaked at a recent record high of 10%, the Recession was the worst since the Great Depression, and it will take a generation to dig ourselves out. If we are lucky. The only way Bush could have done more damage was to nuke a few Democratic northern cities.

  10. raven:

    Tax Cuts Don’t Lead to Economic Growth, a New 65-Year Study …
    http://www.t heatlantic. com/business/…/tax-cuts…economic…/262438/

    Sep 16, 2012 – Does this story prove that raising taxes helps GDP? … Congress has cut tax rates repeatedly over the last 60 years, while the country and the …

    FYI.

    It’s self explanatory. Supply side economics is magical thinking. Magic doesn’t work.

  11. fifthdentist:

    “The only way Bush could have done more damage was to nuke a few Democratic northern cities.”

    Funny you should say that. That was rMoney’s plan on dealing with the pesky 47 percent of (mostly dark-skinned) moochers if he had won.

  12. raven:

    From the article above. Here is what economists really think about tax cuts growing the economy.

    Tax Cuts Don’t Lead to Economic Growth, a New 65-Year Study Finds
    Derek Thompson Sep 16 2012, 1:53 PM ET

    Print Here’s a brief economic history of the last quarter-century in taxes and growth.

    In 1990, President George H. W. Bush raised taxes, and GDP growth increased over the next five years. In 1993, President Bill Clinton raised the top marginal tax rate, and GDP growth increased over the next five years. In 2001 and 2003, President Bush cut taxes, and we faced a disappointing expansion followed by a Great Recession.

    Does this story prove that raising taxes helps GDP? No. Does it prove that cutting taxes hurts GDP? No.

    But it does suggest that there is a lot more to an economy than taxes, and that slashing taxes is not a guaranteed way to accelerate economic growth.

    That was the conclusion from David Leonhardt’s new column today for The New York Times, and it was precisely the finding of a new study from the Congressional Research Service, “Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945.”

    Analysis of six decades of data found that top tax rates “have had little association with saving, investment, or productivity growth.”

    However, the study found that reductions of capital gains taxes and top marginal rate taxes have led to greater income inequality. Past studies cited in the report have suggested that a broad-based tax rate reduction can have “a small to modest, positive effect on economic growth” or “no effect on economic growth.”

  13. fifthdentist:

    Damn liberal studies and their “facts.”
    What’s next, a study that shows the gay can’t be cured?
    Or that Saddam Hussein didn’t have WMDs?
    Or that the warming earth isn’t caused by Jesus hugging us closer?

  14. mildlymagnificent:

    “Shrink your way to greatness” Always a winner when logic and evidence are shut out of the discussion.

    It’s a bit like thinking that your garden will grow faster and better if you don’t feed, water, manage it but that some garden lover will appear in exactly your neighbourhood and do all those things for you. And the result will, of course, be better than if you’d consistently put in a few hours every month and a few dollars occasionally.

  15. Zinc Avenger (Sarcasm Tags 3.0 Compliant):

    You talk crazy talk. Tax cuts lead to demonstrable investment by way of campaign funds, leading to undeniable employment of Republican representatives!

  16. Jafafa Hots:

    I’m shocked that the people demanding tax cuts for themselves aren’t being honest when they say they’re demanding it in order to help other people.

  17. Modusoperandi:

    THEY DID WORK, AND IF THEY DIDN’T WORK ITS BECAUSE WE DID’NT CUT THEM ENOUGH AND THEY DI’DNT WORK BECAUSE THE JOB CREATORS KNEW THAT OBAMA WAS PLANNING TO SOCIALIZ THE ECONOMY AND ALSO DUBYA NEVER EXISTED AND IF HE DID HE WAS NEVER A TRUE CONSERVATIVE AND WE WERE NEVER FOR HIM AND ALGORE IS FAT!

  18. Jafafa Hots:

    They are ideologically opposed to the idea that government can do good things for the economy. That’s all there is to it.

    No. They totally for plenty of things the government does.

    They are ideologically opposed to the idea that anything that doesn’t help them personally should be done by government – or anyone else for that matter.

  19. d.c.wilson:

    Sadly, Modusoperandi’s satire is the likely reaction from republicans. Whenever the conservative religion fails, it’s only because it wasn’t pure enough. And they would rather live in cardboard box under a bridge than give into the Kenyan Usurper anyway.

  20. Ulysses:

    One reason why states with higher tax rates attract businesses (the people who actually do create jobs) is those states usually have better schools, better maintained infrastructure, good social services and other government supplied services, etc. Most people in the middle and upper classes don’t mind spending more taxes for these things as it’s seen as the cost of having good things.

  21. Stephen "DarkSyde" Andrew:

    In related news increasing caloric intake does not result in weight loss.

  22. alwayscurious:

    As if tax rates were the prime reason a company came into being & did anything:

    Apple is headquartered in California
    Microsoft is headquartered in Washington
    Hershey in Pennsylvania
    ….

    It certainly wasn’t because these are places where the job creators happened to live when they hit upon their great ideas. I’m sure it’s because the respective founders stopped & asked, “Gee, does this state offer good tax incentives? I bet I could get a better deal in Wisconsin.”

  23. alwayscurious:

    In related news increasing caloric intake does not result in weight loss.

    I’m sure Rob F would argue that one might be in a situation wherein additional caloric intake would be necessary to promote lose weight through exercise.

  24. Modusoperandi:

    alwayscurious “As if tax rates were the prime reason a company came into being & did anything…”
    To be fair, they’re quite willing to accept the infrastructure of where they are while keeping profits where they aren’t to avoid the high taxes where they are. Did you know that states take that money and just waste it on crap like infrastructure?

  25. left0ver1under:

    Anyone who ever took an Economics 101 class knows about the “multiplier effect” on an economy. The higher the multiplier, the more growth there is in an economy. It’s funny how the “big name economists” seem to have forgotten such a basic principle.

    It goes like this: About 20% of money spent in an economy is removed for taxes while 80% is respent as employee wages and company expenses. So if $100 is spent, $80 goes back into the economy, then $64, then $52, etc. When all that money is added, will be at least four times the original amount, or even five in a consumer-driven culture. And that’s not just for one person, that’s true for every dollar spent by all people.

    Bottom line: Tax breaks and higher wages for the majority of consumers will drive an economy and create jobs. Tax breaks for the rich do very little except make the rich richer and maybe sell some luxury goods.

  26. Azkyroth Drinked the Grammar Too :):

    Tax breaks for the rich do very little except make the rich richer and maybe sell some luxury goods.

    And keep the economy foundering so the serfs will have to consider themselves lucky to have jobs at all. If you’re a complete fucking monster, it’s win-win.

  27. jeroenmetselaar:

    Companies are not only looking for lower taxes (or cheap personnel) when choosing where to build a new plant or office. After all they could get that in African jungles and Asian deserts.

    Nor does it make sense for a (local) government to try and compete on that level. After all you will be competing with the likes of China and India in creating a destitute and powerless work force. From your own electorate….

    Companies know how costs can be balanced with benefits. If, for example, a higher tax rate in a region is compensated for with a world class infrastructure and a higher minimum wage is balanced against a well educated and healthy work force it all works out.

    Cheap uneducated labour in the middle of nowhere can be found across the globe, try to offer something more and they will come.

  28. matty1:

    Don’t really need a study to know that tax cuts do absolutely zero to spur the economy.

    This attitude irks me, yes in this case your assumption without a study happened to be correct but on another issue you could be wrong. If we settle questions without evidence or on no better evidence than individual experience we are no better than those we criticise.

  29. Dr X:

    Seems a failure to note a distinction between state and federal taxes in some of the comments. There is a great deal of research showing that differential levels of state taxes don’t predict growth of state economies. This doesn’t apply to federal taxes. One key difference is that state tax cuts, unlike federal tax cuts, are a zero-sum game because states must ultimately balance their budgets.

    Rob F is correct about the view of economists, when we’re talking about federal tax cuts (there are some circumstances when cuts would be expected to make a difference). The blanket assertions that this is some sort of nonsense he’s espousing is as ill-informed as the all-tax cuts, all-the-ime, lead to growth view espoused by conservatives. It depends on whether we’re at less than full employment and it depends on who is getting the tax cuts and under what circumstances. For example, in a demand-side recession with high unemployment, a tax cut to businesses isn’t going to be helpful, but a cut in payroll tax on the employee contribution side is going to be stimulative. Is this the best way or the only way to reduce unemployment? Not necessarily, but this isn’t some baseless idea that has been discarded by mainstream economists. Or is Keynes dead? Are economists all Austrians now?

  30. Dr X:

    29ctd:

    This is why, last December, so many economists were bemoaning the fact that the temporary payroll tax cuts were going to be allowed to expire.

  31. democommie:

    Who paid for this study, Soros or those homeless fucks that I see hangin’ around the meth clinic, sellin’ their blood and semen to get a fix?

  32. D. C. Sessions:

    Yet this is one of the most fundamental beliefs of every conservative.

    You sound like “objectively false” is an obstacle to “most fundamental beliefs of every conservative” instead of a requirement.

  33. D. C. Sessions:

    And they would rather live in cardboard box under a bridge than give into the Kenyan Usurper anyway.

    That’s overstating it a bit.

    However, they would rather have us living in boxes under bridges (or maybe sharing a box, no more bridges).

  34. matty1:

    They are ideologically opposed to the idea that anything that doesn’t help them personally should be done by government – or anyone else for that matter.

    What about the warfare state?

  35. Skip White:

    One problem with tax cuts is that they can lead to decreased government spending, which can lead to decreased government jobs. Of course, depending on one’s ideology, government jobs may or may not count as jobs, even though in reality they do count as jobs, and the money paid to government employees in the form of paychecks gets spent on goods and services just like anyone in the private sector.

  36. alwayscurious:

    One problem with tax cuts is that they can lead to decreased government spending, which can lead to decreased government jobs. Of course, depending on one’s ideology, government jobs may or may not count as jobs, even though in reality they do count as jobs, and the money paid to government employees in the form of paychecks gets spent on goods and services just like anyone in the private sector.

    Our state government is committed to reducing the number of hours worked by state employees–which has lead to a local recession in the capital. Turns out the local small businesses (especially restaurants) relied heavily on state employees. Little known fact: un/underemployed state workers neither spend as much money nor pay as much in taxes as they did while full time.

  37. Michael Heath:

    Skip White writes:

    One problem with tax cuts is that they can lead to decreased government spending, which can lead to decreased government jobs. Of course, depending on one’s ideology, government jobs may or may not count as jobs, even though in reality they do count as jobs, and the money paid to government employees in the form of paychecks gets spent on goods and services just like anyone in the private sector.

    I think there needs to be an independent outside motivation to defend government jobs. Otherwise your point runs into a circular argument, we need government to hire because we need jobs. Two primary justifications are as follows:
    1) There are goods and services where the market fails and yet if gone unfilled, growth will not be optimal. Therefore we should prudently staff government in order to produce these goods and services to promote optimal growth.
    2) In certain types of recessions, it may be prudent to not lay-off government employees in spite of decreased tax revenues, but instead deficit spend. Otherwise such lay-offs will result in further economic contraction, even less tax revenues, and more jobless people seeking government relief. The hole this creates will make more difficult and take longer to recover after the end of that business down cycle.

    I don’t think #2 should be done blindly. For example, in the 2009 stimulus the federal government’s first act was to protect state-level government employees. That might be prudent in a state whose long-term growth prospects are bullish, but not in a state like my home state of Michigan. We’d have been far better off with more infrastructure projects than maintaining staff for a stagnant or dwindling population; even if our funding was delayed several weeks relative to those states who took money to defend state-level government jobs disproportionate to our infrastructure funding requests.

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