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Did tax cuts really help create jobs?

As Congress debates the extension of the Bush tax cuts, it’s a good time to look at what we got for the money we gave away. It’s a lot: an estimated $2.5 trillion by the time the cuts are scheduled to expire at the end of the year, according to Citizens for Tax Justice. Those tax savings went overwhelmingly to the wealthiest Americans, and the richer you were, the more you saved. A great graphic in the New York Times last week dramatically shows how well you fared, too.

The promise was that cutting taxes would bolster the economy and create jobs.

But the record shows just the opposite. The national rate of job growth during George W. Bush’s tenure was the worst since the government starting counting in 1939.

The tax changes didn’t do much for Vermont, either. Job growth so far this decade is worse than any decade since the 1940s. We have fewer jobs today than we had in 2000.

The federal tax cuts were clearly good for some, though. Vermonters with incomes of $200,000 or more saved a total of about $660 million between 2003 and 2008 on their federal tax bills.

But did those tax savings lead to investment in job-creating activities to benefit the rest of us? A report from the Congressional Budget Office last February casts doubt on the theory that they did—or ever would.  “[I]ncreasing the after-tax income of businesses typically does not create much incentive for them to hire more workers in order to produce more, because production depends principally on their ability to sell their products,” the report said.

It’s impossible to know what would have happened without these tax policy changes. Many factors influence the economy. Still, there’s reason to be skeptical when tax cuts are offered as the cure for all problems.

Bush first proposed tax cuts in response to a modest budget surplus: The government was collecting too much money, so we should cut taxes. But then the economy slid into recession in 2001 and revenue looked weak, so Bush trotted out the supply-side argument: We needed to cut taxes in order to stimulate the economy and generate more revenue.

The corollary to tax-cuts-make-everything-better is that tax increases make everything worse. That’s exactly what a lot of people predicted when Clinton proposed raising taxes, primarily on the wealthy, in the early 1990s. For Vermonters, this was on top of state tax increases Governor Snelling and the Legislature had already enacted—again, largely on the wealthy—to solve a budget deficit.

Now here’s an interesting fact: In the 1990s, after these federal and state tax increases, Vermont’s private sector jobs increased 22.7 percent.

Jobs are always held up as the reward for tax breaks. And when we offer tax credits to businesses in return for creating jobs, at least we ask for proof that they have, in fact, added new positions. (We’re less demanding of proof that the jobs would not have been created without the tax credit.)

With broad tax cuts, however, we’re supposed to take it on faith that lower taxes will translate into more jobs. Only after the money is gone do we get a chance to tally up the return on our investment.

After this last round, it appears there is little to show at either the national or state level for the money that stayed in the bank accounts of the wealthiest among us. That money could have been spent on early education or colleges, building new fuel-efficient mass transportation, or getting broadband to people and businesses who desperately need it. All these activities would be good for everybody: rich, poor, and in-between.

And unlike tax cuts, they are proven economy-boosters. That means jobs.

Posted by Jack Hoffman on September 24, 2010 at 1:12 pm

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