Heard on the Cable: How the Bush Tax Rates Killed Demand & Created Unemployment

Last night, during insomnia-driven, late-night (early-morning?) viewings of CNN's Parker Spitzer and MSNBC's Ed, I heard variations on a theme. The Bush tax cuts, don't know you, especially the cuts for individuals making over $200,000 and households pulling down more than $250,000 have always been a disaster and led to the long breadlines that formed in America immediately upon the resolution of Bush v. Gore.

On Ed, admitted serial soap stealer Michael Medved was defending the extension of the Bush rates to everyone come January 1, 2011. Part of his argument was that it's the wealthier segments of the population are the ones who invest in businesses that create jobs, etc. To which the eponymous host yammered on about how those cuts in particular and the Bush years in general were a disaster for regular folks who couldn't find jobs.

On Parker Spitzer (full disclosure: I've been on the show and think it's pretty darn swell) former New York governor and co-host Eliot Spitzer challenged Americans for Prosperity jefe Tim Phillips to explain why banks and businesses were sitting on some $2.5 trillion worth of cash rather than giving it out. As is his Keynesian wont, Spitzer said that it was lack of demand and that only the government could fill the gap, by taking the $70 billion or so that might be gained annually by reverting to Clinton-era tax rates on the wealthy and using it to stimulerate the economy back into maximum overdrive.

There's no question that George W. Bush presided over a craptacular job-creation record, especially if you care about private-sector employment. As Reason columnist Veronique de Rugy wrote at The Corner:

Under Bush, private employment shrank by 673,000 jobs, federal employment grew by 50,000 jobs, and government employment grew by 1,753,000 jobs.

It's also true that the unemployment rate under Bush (2001-2008) was pretty damn low, too, peaking at 5.99 in 2003 (the last gasp of the tech bubble's bursting).

There are many things to complain about from the Bush years. Even the least inattentive reader or guest to this site should recall our continuing litany of them. I'm not sure that the unemployment rate is one that rises to the top. I am certain that Bush's wild spending - isn't government spending supposed to return $1.50 for every buck that goes out the door? - is at the very top of his economic FUBARs. And that doubling or tripling down on even more stimulus spending "to spur demand" makes about as much sense as drinking yourself sober.

Comments

[P Brooks]

I'm getting really tired of people trying to tell me there is a direct causal relationship (positive or negative) between personal income tax rates and employment.

[robc]

If a certain occupation came with a 102% tax rate, I wouldnt accept the job. That is a direct causal relationship.

[R C Dean]

Believe it, P. Brooks. Because many of the small businesses in this country are "pass-through" entities, they are taxed at personal income tax rates.

The higher those rates are, the fewer people those small businesses will employ.

[cynical]

Not necessarily. Let's say tax rates are 30%, I'm making $150k myself, with no overhead. I can bring someone else on for $40k who will increase my gross by $50k. So, if I hire them, my income will increase to $160k, but my gross will be $200.

If I work for myself, my after tax income is 150 - (.3 * 150), or 105k.

Now, if wages weren't tax exempt, then I would be taxed on 200k. My income would be 160 - (.3 * 200), or 100k. I'd be better off not hiring them.

However, wages paid are tax exempt, so I would actually only pay 160 - (.3 * 160), or 112k, which is still better than 105k.

Raising taxes doesn't actually make hiring a person a worse decision, and even if the tax rate was zero, hiring someone who was a net negative would be a bad idea unless I was trading personal leisure time for income.

[derek]

Having to come up with cash in a timely way to pay taxes does affect decisions on hiring.

But more importantly, the money goes to do something presumably. Hire more people. The hires of government have a tendency to show up in unpleasant ways that cost you even more money.

And the money available is spent through contracts. A business sector grown dependent on government contracts are often useless without them. The pathologies that build up to satisfy the process of government contracting don't translate into anything else. So we see the perverse reality where areas who have large amounts of government spending and contracts have stagnant or shrinking economies.

The skills you were born with to suck on a teat rarely translate into remunerative work later in life.

Derek

[Ken Shultz]

"I'm getting really tired of people trying to tell me there is a direct causal relationship (positive or negative) between personal income tax rates and employment."

The one that's big in California--and judging by Gillespie's post is obviously getting airplay nationally now too? ...is the suggestion that our government would stop overspending if it had more of our money to spend...

Really, that's the one that's just killin' me these days.

If we just repealed Prop 13 and California could raise property taxes?

...then Sacramento would stop spending so much money!

If we just got rid of the Bush tax cuts--and gave the government more of our money to spend?

...then Washington would stop spending so much of our money!

Those arguments shouldn't be reasonable to anybody. Drunken sailors would spend less if they had more money to spend?! I am so tired of hearing that from people. No reasonable person can think that.

I'd understand if the people saying that were worried about inflation or something--but their champions are running around the world right now trying to think up new and better ways to make more inflation happen.

[micsolana]

"On Parker Spitzer (full disclosure: I've been on the show and think it's pretty darn swell)"

I need to believe that this is a lie. Please help me believe that this is a lie?

[Fist of Etiquette]

I've only seen the show when Gillespie was on it but it seemed somewhat swell to me, if CNN could only figure a way to edit that awful Parker and repugnant Spitzer out.

[Episiarch]

Nick is too nice. I don't know how he could be on that show and not feel the impulse to rip Spitzer's throat out. At least he completely dominates the show when he's on; that's a plus, I suppose.

[JW]

Nick should change his ring tone to The Beatles "#9" and have Matt call him a couple times, now that Apple has changed the universe as we know it by adding The Beatles to iTunes.

[Episiarch]

"Norwegian Wood", obviously, you tool. You are the worst Beatles fan ever.

[JW]

That is a badge I will wear with great pride.

[SugarFree]

I like to think that Nick keeps it classy on the show by expressing his displeasure in less obvious ways... stink-palming Sptizer, for example.

[creech]

This "Bush's policies wrecked the economy" or "Bush's tax cuts are responsible for the Great Recession" were heard everywhere as Democrat talking points in the recent elections.
Yet no one I talked to could give me any cause and effect reasons why the Great Depression couldn't be tied to
bi-partisan policies.

[Barry D]

This stuff goes without saying in my book, though many people need to hear it. I'd be willing to bet that most "average Americans" would love to have the economy of 2005 back, though.

But "soap stealer"? When I pay $150 for a night in a non-luxury hotel room, I figure I've paid for the microsoap and tiny bottle of shampoo. Realistically, I've also paid for the towels, too, but traditionally, taking them is considered "theft." The soap, however, comes with the room, just like the little mints and paper cups.

[Nick]

It's true no matter how much you paid for the room. Soap and shampoo are complimentary.

[Barry D]

That's true, though most hotels don't make "complimentary soap" a big part of their marketing. 🙂

[?]

No one but you has ever seen this show, Jacket, so tell us?which thinking-about-his-cock face did Parker make while Spitzer was talking about filling America's gap with stimulation? The "oh my" one or the "FUCK YEAH" one?

[Dello]

"Even the least inattentive reader..."

Wow: Double negative much?

[alan]

If you don't not know what you are doing, double negatives are good clean fun for the whole family.

[Slut Bunwalla]

I'm not sure that's not true.

[mitch]

Economics is hard; let me rephrase this so I can see if I understand it. People who earn 250K a year or more don't spend or invest their money, they just pile it up in the basement or penthouse and sit on top of it like a dragon. If politicians seized that money (good luck, Bilbo) they would hand it out to the people who vote for them, which would be better. Somehow.

[Zeb]

I think that they actually swim in the money, Scrooge McDuck style.

[Jeffersonian]

To which the eponymous host yammered on about how those cuts in particular and the Bush years in general were a disaster for regular folks who couldn't find jobs.

Because nothing sez "jobs for everyone!!" like a nice tax increase.

It's time for the producers to wrestle Ed to the floor and stick something between his teeth.

[P Brooks]

The higher those rates are, the fewer people those small businesses will employ.

I call bullshit.

The single most important factor is the marginal return of those employees. If they don't bring in more revenue than their cost of employment, they either get dropped, or never get hired in the first place.

I don't know about you, but most people (particularly small business owners) do not operate as a charity.

[John]

Yeah but it is a pain in the ass to go out and get business to support those employees. As a business owner I only do it because I get to keep the profits. The more the government taxes me, the less incentive I have to do that. Why take out a loan and possibly risk my future income if the government is going to take most of the money I earn if things turn out okay? Why not just stay small and not work as hard?

Taxes absolutely affect business behavior.

[Barry D]

So you're saying that taxing that revenue at a higher rate (i.e. lowering the net revenue as seen by the business) while the cost of employing someone remains the same doesn't change the Net Revenue - Costs equation?

You call "bullshit"?

I call "REALLY STUPID!" You explained in your own post that your assertion was not only wrong, but completely stupid.

[cynical]

The cost of employing someone doesn't actually stay the same, on net, when you consider that the wages are tax deductible.

[Barry D]

That's true.

However, if you assume that employee wages < revenue (and why else would you have a business?), the tax on revenue will be higher than the tax deduction on wages.

Consider the AMT, and the whole thing blows up.

[cynical]

I assume you mean gross revenue. Obviously employee wages, particularly in toto, can be much higher than your net revenue. However, your tax is being paid on your net revenue, so it's by no means certain that the tax on your revenue will be higher than the tax deduction on wages.

[derek]

Many of the taxes employers pay have nothing to do with taxes on profits

[Ken Shultz]

Cutting the cost of employing people means they're more attractive to potential employers. Cutting the cost of employing people makes them easier to hang onto too.

I don't see anything wrong with any of that. Businesses wouldn't even have to pay each employee as much if each employee got to keep more of their pay.

How does adding to the cost of labor make labor more attractive? That's the question.

I'd so much rather have almost any other kind of tax--rather than an income tax. Taxing people's income has got to be the most counter-intuitive thing to tax!

...from any perspective other than class envy anyway. Why would they want to raise the cost of hiring people--when unemployment is such a big problem? Why wouldn't they slash the cost of hiring people--when unemployment is such a big problem?

[P Brooks]

lowering the net revenue as seen by the business

Are you assuming a tax rate >100%?

Personal income tax rates are obviously important, but they do not have a direct causal relationship (in isolation) on the general employment rate.

Anybody who claims, "I woulda hired some more people but they raised my income tax from 32% to 36%" is no more credible than a woman who says, "I kicked my husband out because he didn't buy me flowers for Mother's Day."

There's (a lot) more to the story.

[Barry D]

"Are you assuming a tax rate >100%?"

No. Why would I? That's also stupid.

WRT the rest, you're wrong. And NOTHING happens in isolation, so that's not an argument one way or another.

http://www.heritage.org/Resear.....-Acts-Soon

[derek]

Let me explain this very simply to you.

As an employer, the taxes I pay are dependent on how much is left after all the expenses. Then the government takes a portion of that.

If I want to hire an employee, I have costs. In my case, about $75000 or so immediately and higher operating costs over time. That $75000 comes from my pocket. Money that I made in previous years allows me to reinvest in increased capacity.

Every dollar of taxation is one less dollar available to build capacity and employment.

Derek

[Barack Obama]

If people without jobs were induced into national service, our unemployment rate problems would be solved.

[P Brooks]

$75000 or so immediately and higher operating costs over time. That $75000 comes from my pocket.

If you're losing $75k per employee you have more problems than the Boosh Tax Cutz.

[cynical]

I think he's talking about the up-front capital investment. And while, in the long run, that is also tax deductible, that's irrelevant if he doesn't have the cash to purchase equipment on hand or access to credit.

It's a valid point, but one that mainly applies to capital-intensive businesses.

[P Brooks]

If the marginal return of your next/last employee is greater than zero, at the point where revenues pass through to you (in our theoretical case in which net income from the business is taxed as personal income to the business owner), unless your marginal tax rate is 100% (or more) your after tax income increases.

If that employee's contribution to the bottom line is negative, you're an idiot.

[P Brooks]

Cutting the cost of employing people means they're more attractive to potential employers. Cutting the cost of employing people makes them easier to hang onto too.

I agree completely.

There are enough good reasons to favor low rates and a simple tax code, I don't see why we have to get bogged down in (mostly) false causalities.

[Best of HuffPo]

nhfarmer (39 Fans) writes:

The solution is so terribly obvious to me. The wealthy generally get wealthy off other people's labor. So if you take a wealthy person's money away in increased taxes, the wealthy person will be motivated to hire more people to make the money back. On the other hand, if you decrease the taxes of the wealthy, the wealthy will go on a long vacation and lay off their workers while they are gone.

[cynical]

Exchange "wealthy" for "skilled", and he has the makings of a new Plato.

There seem to be two causes of the deterioration of the arts.
What are they?
Wealth, I said, and poverty.
How do they act?
The process is as follows: When a potter becomes rich, will he, think you, any longer take the same pains with his art?

Certainly not.
He will grow more and more indolent and careless?
Very true.
And the result will be that he becomes a worse potter?
Yes; he greatly deteriorates.
But, on the other hand, if he has no money, and cannot provide himself tools or instruments, he will not work equally well himself, nor will he teach his sons or apprentices to work equally well.

Certainly not.
Then, under the influence either of poverty or of wealth, workmen and their work are equally liable to degenerate?

That is evident.
Here, then, is a discovery of new evils, I said, against which the guardians will have to watch, or they will creep into the city unobserved.