Debunking the Myth of Job Creation

An enduring myth of both economics and politics states that businesses, regardless of size, create jobs.  It is most often claimed that small businesses create the majority of jobs in our nation; it may be true that small businesses hire more workers than any other sector of the economy but it is easily demonstrated those businesses do not create any of those jobs.  If they did the solution to our current economic woes would be for more businesses to simply hire more workers, but that is an obviously unworkable idea.  If GM hired more workers to build more cars they could not hire enough workers for those employees to be able to afford to buy all the new cars the company would be producing and they would likely wind up having to lay off more workers than they had originally hired.

Businesses only provide jobs by hiring workers in response to consumer demand for goods and services.  Businesses do not create demand, they respond to it.  It is consumer demand that drives job creation, the more demand created for goods and services the more jobs will be created.  A business only hires a worker when it feels there is sufficient demand for the product that they will profit by hiring someone to do that job.

How do we increase consumer demand?  We find ways of putting more money in the hands of consumers, the majority of whom are wage-earning workers.  It should be obvious by now that continuing to give tax breaks or subsidies to businesses, while not entirely inappropriate in certain instances, will do nothing to spur job creation; and since wealthy persons on average spend a far smaller amount of their incomes on consumer purchases lowering their taxes will fail to provide any stimulus that would cause a sizeable increase in hiring.

The most direct way to increase consumer demand and create jobs is to increase wages.  The most famous example of the efficacy of this tactic is when Henry Ford instituted a five dollar per day minimum wage for his factory workers in the correct assumption that if they could afford to purchase the product they manufactured most of them would.  But his action went beyond that because the increase in their pay made it possible for them to buy other consumer goods, creating demand for other products, the producers of which had to hire more workers, again increasing consumer demand.  It is this cycle of increased wages creating greater hiring that is illustrated by the fact that at no time has there been a decrease in hiring concurrent with increases in the national minimum wage.  Whereas it would be preferable for employers to act in their own best interest and raise wages voluntarily, the fact that worker productivity and corporate profits have risen steadily over the last thirty years while wages have remained stagnant indicates this change may only be practically effected by federal legislation to increase wages.

Increasing wages is the primary means by which the private sector can increase consumer demand and it is by far the most effective, but there are other actions available to the government alone.  The first of these would be to lower taxes charged to low-and middle-income workers; this would have a similar effect on their disposable income as a wage increase, with the drawback that any resulting decrease in revenue would have to be offset by a similar cut in government spending or otherwise increasing revenue.

The most counterintuitive and therefore least popular means of increasing demand is to increase social spending on programs like food stamps and TANF.  This does create jobs because the persons to whom it is disbursed have little choice but to turn around and spend the money for food and other items that contribute to the creation of jobs for those who make the products and provide the services these individuals need.  An increase in social spending results in increased purchases, fueling creation of jobs; some of these jobs may be taken by benefit recipients, resulting in a simultaneous provision of useful employment and reduction in the nation’s social burden

The “businesses create jobs” idea is often used as a justification for either decreasing or refusing to increase taxes on higher income individuals who are assumed to be mostly business people and therefore “job creators”.  Now it has been demonstrated that it is the employees themselves who are the true job creators, and the most effective means businesses have to avoid tax increases is to pay workers more, every cent of which would be tax deductible for the employer; doing this would also increase the amount of revenue collected on the incomes of those workers, reducing any potential need to increase taxes on higher incomes.  By this process business owners do take an active part in the creating jobs and contributing to greater tax equality for all.

Tax Reform for Dummies

A recent editorial in a major  newspaper put forth the idea of setting a target date of December 31, 2013 for the elimination of the current income tax code and replacing it with a more equitable structure.  Now the idea of setting such a date is a good one, but the author knows very well that expecting Congress to agree on a replacement in such short order is completely unrealistic.  There are too many varied interests to be represented and their views considered.  Due to the complex nature of our nation’s economy no system can be created within such a small window of action that most Americans would consider truly equitable.  But perhaps no system at all is precisely what we need.

It can be said that the cardinal rule of taxation is the broader the tax the smaller the burden on any individual taxpayer.  This was a primary motivation for the institution of the federal income tax early in the 20^th century.  At first the rate was uniform and applied only to the top one percent of the incomes in the US; but as the income tax began to be relied on for a greater and greater share of the government’s finances, in the absence of anything more equitable graduated rates and targeted exemptions were devised.  Now we have reached a juncture where a sizeable portion, if not a majority, of Americans feel that the current income tax code is unacceptably inequitable.  It seems nearly everyone has his own idea of what would be fairer, but those which would ease current burdens on the wealthy would place more of one on the poor, and those which attempt to make things easier for the poor wind up putting a heavier load on the wealthiest of Americans.

 With hundreds of millions of persons being taxed individually based on their incomes we have long passed the stage where there can be any hope of achieving equity in taxation through simplification of the income tax code; no matter which way you slice it some significant portion of those being taxed will feel they are being expected to shoulder more than their fair share of the burden. The idea of allowing large scale tax exemptions for investing surplus income into areas that would reliably encourage growth of the economy ended with the Reagan era tax reforms and no one has had the stomach to resume the practice since then. In order to achieve both simplicity and equity nowadays it will be necessary to abandon the taxation of individual incomes altogether and instead base our taxation on the broader base of the wealth of the nation as a single unit.

At the current time our federal government’s revenue from income tax amounts to just under ten percent of the gross domestic product. If we establish that as the single rate at which to tax the nation’s income everyone will share an equal proportionate burden on his income.  But if everyone were paying this amount out of his own pocket we would be back at the idea that the rich would be benefitting from a very low tax rate while most poor Americans would be unable to afford to pay such an amount.  The solution, then, is for no one to be required to pay anything out of his pocket to finance any of the government’s activities currently financed by income taxes.

In this day and age of computerized record keeping and regulated markets it is fairly easy to keep track of just how much income is derived from all the nation’s economic activity.  With this information our government can determine with great accuracy how much revenue it would have at its disposal if the tax rate for the entire nation were ten percent of the gross domestic product. Having this knowledge, all Congress need do is allocate the revenue to the various executive departments and allow them to write checks accordingly.  Considering that the vast majority of all financial transactions in this country are now electronic and do not involve any actual currency changing hands, this is not any great change in the way things are already done.  The main difference is that, instead of everyone having fewer dollars to spend after paying taxes, the dollars that that everyone has are reduced in value by a uniform amount.  In either case the government has effectively taxed everyone’s income by that rate of ten percent but because by simply writing the checks Congress is actually taxing the entire wealth of the nation by the rate of ten percent of only the GDP, the value of your money is not diminished by that same amount.  The net worth of all private assets in the US is approximately $55 trillion and the projected revenues for 2012 of federal income tax revenues is $1.4 trillion that works out to only a 2.5 percent tax on the entire economy as a whole. Since under this system you are not required to give any of your money to the government even poor people are unlikely to feel much of an adverse effect from such a small individual burden, especially since it is being applied universally to everyone.

As previously stated, the broader the base of a tax the smaller the burden on individual taxpayers, and there can be no broader base than the wealth of the nation as a whole unit.  Complete fairness and equity is built into this system as the richest American pays no more or less than the poorest; everyone pays an equal share, even he who has no income at all, since the tax is more against the value of what he owns instead of the amount of money he makes in a given year. It would be hard to imagine a simpler plan than having Congress set a percentage of the GDP to which they limit their spending; they would even retain the ability to borrow when necessary, so long as the cost of servicing that debt is incorporated within the spending limit.  Leveling the tax burden in this fashion would also limit the scope of debate in Congress from which groups' taxes need raised and which ones' lowered to whether or not to raise or lower them for all. It would eliminate numerous opportunities for the bitter, class-based, partisan rhetoric we have all become far too familiar with; that is a fringe benefit I believe most Americans would welcome with open arms.