How Would Cutting Taxes Boost Employment?

For well over a decade now–arguably for more than three decades–the Republican answer to every fiscal or economic challenge, whether it’s budget surprluses or budget deficits, a boom or a bust–has been tax cuts. And so it is today. But they sometimes get a little slippery when you ask, mechanically, how lower taxes are going to boost this or that positive indicactor.

The key question challenge now, of course, is increasing employment. As Bruce Bartlett notes at Economix today, the key concept for assessing the impact of a tax cut on employment is the “tax wedge,” the “difference between the cost to an employer of employing a worker and the after-tax reward that the employee receives.” So reducing the “tax wedge” via a tax cut could allow employmers to “hire workers at a lower cost without reducing their after-tax wages.” But is that possible right now? Not really, says Bartlett:

One problem with the tax-wedge theory is that taxes are at a historical low as a share of the gross domestic product. According to the Congressional Budget Office, federal revenues will be 15.8 percent of G.D.P. this year. The postwar average is about 18.5 percent, and taxes averaged 18.2 percent during the Reagan administration; indeed, at their lowest point in 1984, federal revenues were 1.5 percent of G.D.P. higher than they are now.

Another problem is that there hasn’t been a significant tax increase affecting average working people since 1983, when Reagan raised the payroll tax rate to 15.3 percent from 13.4 percent (employer plus employee). Contrary to popular belief among Republicans, there have been no significant tax increases during the Obama administration. In fact, there have been tax cuts aimed directly at workers.

The making-work-pay tax credit consumed some 40 percent of the budgetary cost of the 2009 stimulus package and reduced taxes for every person or household with a positive income-tax liability and an income below $75,000 in 2009 and 2010. In 2011 and 2012, the making-work-pay credit was replaced by a temporary 2 percent cut in the payroll tax rate, reducing taxes for every worker.

The reason that unemployment is high clearly has nothing to do with taxes. Consequently, there is no reason to think that reducing taxes further will do anything to raise employment by reducing the tax wedge.

With that theory out of the way, of course, Republicans might well shift to hazier and thus less refutable theories, even magical theories, of why tax cuts on businesses or high earners will make everything better: you know, by boosting business “confidence,” “rewarding innovation,” or “lifting the dead hand of government from the vital engines of growth,” blah blah bark bark woof woof. But whatever the direct beneficiaries of tax cuts get out of it, don’t expect the goodness to be shared with unemployed workers.

Ed Kilgore

Ed Kilgore, a Monthly contributing editor, is a columnist for the Daily Intelligencer, New York magazine’s politics blog, and the managing editor for the Democratic Strategist.