THE BLOG
10/31/2011 04:22 pm ET Updated Dec 31, 2011

Job Creators: Our New "Epic Heroes" Whose Low Taxes May Actually Reduce Job Growth

Recall the epic hero (Odysseus, Aeneas) from Greek and Roman mythology. Exiled by the Fates, beset by terrifying barriers and obstacles, the Hero overcomes all travails by unwavering adherence to a particular world view and completes his long journey home.

Today's epic Hero is "Job Creator" -- let us call him "JC". His world view is low taxes. According to Republican (Regressives') mythology, JC's only reason for existence is to create American jobs, that is what his life is all about -- but he has been crucified by taxes, shackled by regulations, and, worst of all, has had his name taken in vain.

Regressives claim to ride to JC's rescue with their sirens' song of cutting taxes on the wealthy -- even more! With an economic downturn every decade or so (e.g., 1979, 1989, 2001, 2008), and with their taxes cut on the grounds that will get us out of that recession, tax rates on the wealthy will asymptotically approach zero in about 40 years. All they have to do is live long enough.

And, if Larry Kudlow can make it until then, one can be as certain as the sun rising in the east that he will proclaim that tax revenues will actually rise at a tax rate near zero.

Regressives' 4-decade propaganda about the "incentives" low taxes provide the wealthy to create jobs has limited "debate" to whether such policies spur job growth. There has been no discussion about how low taxes on the wealthy may actually reduce job growth.

Could Regressives be JC's secret enemy?

Low taxes may actually cause JC to be lazy. After all, Regressives tell us that unemployment compensation makes the unemployed lazy. Are the rich so different? If it becomes easy because of lower taxes to keep more of their profits, will they not just go surfing? Indeed, the rich -- who have more than what they need -- are far more likely to be made lazy by the increased money that lower taxes provide them than the unemployed are by unemployment insurance that barely, if at all, enables them to survive.

Suppose, for example, that JC runs a small business that has $2M in revenues and $1M in expenses, of which $350,000 are salaries and benefits for 5 employees. He has a profit of $1M, and pays taxes on that profit.

One key fact Regressives never mention, of course, is that employee expenses are deducted BEFORE taxes are levied, i.e., they reduce the amount that is taxed at all. [Hint: that is one reason changes in tax rates have no impact, positive or negative, on job creation].

Suppose the tax rate on the profits is 20%, so JC rocks home with a cool $800K. That's pretty nice. Is JC going to risk that by expanding his company and hiring more Americans? Perhaps not. Moreover, note that because of the deduction of employee expenses BEFORE taxes are calculated, at a tax rate of 20%, hiring another 5 employees "costs" him $280K, i.e., the other $70K would go to the government in taxes anyhow, but JC is putting out $280K of his otherwise free income to hire more workers. That "ain't hay".

Suppose, on the other hand, his tax rate is 70%. Now, he fox-trots home with $300K. Not bad, but nothing like $800K after taxes. So, how can he ratchet up his lifestyle, and get closer to that take-home of $800K? One way is to double the size of his company. Hire another 5 workers. Note, that because of the higher tax rate, his net cost for hiring those workers is only $105K, i.e., the other $245K of his profits would go to the government in taxes anyhow at a 70% rate.

Let us say that, by doubling the size of his company, JC doubles his revenues and doubles his profits. Now, at a 70% tax rate, he chachas home with $600K, not quite the $800K that made him fat and lazy under a lower tax, but getting close, and hiring new workers was not as high a net cost to him since most of the money he would have saved by not hiring would have gone in taxes anyhow.

Let me be clear. This is not meant to argue that higher tax rates inevitably result in higher employment. There are so many other factors that it is difficult to be certain. But, there is at least as cogent a case to made for the higher tax rates providing increased incentives as there is for the Regressives' mythology of lower taxes improving JCs' incentives to hire more American workers.

Higher total tax collections have other positive impacts on our economic situation. We can afford more investments to meet community needs -- infrastructure, education, basic research. Not only does that increased economic activity have a positive short-term impact on the economy, more demand for JC's goods that may also cause him to hire, but the long-term impact of better and more efficient transportation/water-systems/sewage systems/energy efficient buildings, a more highly trained workforce, plus more technological discoveries that can ease pain, suffering, cure illnesses, create new forms of energy, and other as-yet unknown breakthroughs, have profound economic benefits such as we have enjoyed for the last 60 years but, if Regressives have their way, will no longer be part of the American story.

JC, our epic Hero, will have found that Regressives' economic mythology is his largest obstacle to finding his way home.