Yes, There's Job Growth. No, Tax Hikes Aren't Why.
California tries to lift the bucket it's standing in.
SACRAMENTO — Most debates about tax policy suggest a widespread understanding of Winston Churchill's quip that "for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle."
Even the advocates for tax increases usually claim such hikes are needed to pay for the level of government spending that they propose or that higher taxes promote income equality, but they rarely doubt that increasing the burden on job creators leads to fewer created jobs. That's because every dollar the government spends it must take from someone who earned it.
But following some welcome news showing a healthier, recovering California economy, some economists and pundits are making the case that Churchill has been debunked. They aren't just saying that recent tax increases haven't been that bad for growth — but that the taxes may sometimes be the cause of it.
For instance, Syracuse University law professor David Cay Johnston, in a recent column in the Sacramento Bee, noted that since the Proposition 30 tax increase in 2012, California's economy has outperformed the national economy. He argues that the highest tax locales in the nation — Manhattan was his example — are home to the best-paying jobs and the most wealth creators.
"People may worker harder, trying to make more money to achieve a desired after-tax income and may slough off if tax rates are lowered," he explained, pointing to some new research. And Los Angeles Times business columnist Michael Hiltzik argued in May that "pro-business policies" such as low taxes, smaller government and a lower minimum wage, actually "hurt state economic growth."
But a little more thought is needed before voters implore their legislators to double their tax burden.
The best "taxes spur growth" argument could be phrased this way: A high level of taxation supports better infrastructure, which enables private enterprise to grow. But Adrian Moore, vice president of the libertarian Reason Foundation, says that can't be what happened here because California has some of the worst infrastructure in the nation and isn't spending much to improve it.
Johnston's theory is the more money the government takes from individuals, the harder the citizenry will work to fill in the gap. Even if true, it's not a particularly moral argument. Is it fair to expect the squirrels to run faster on their little wheels as we redistribute their peanuts to others?
"Yes some people do work harder," said Ford Scudder, of Laffer Associates, the research firm founded by Reagan administration economist Art Laffer. "The high earners who are taxed more receive less after-tax income for each hour of work, and so have less incentive to work. Moreover, the people who receive government assistance … now have additional incentive not to work as well. … We fine speeders to reduce speeding. We tax cigarettes to reduce smoking. So, what should happen when we tax income?"
Texas, which prides itself on its low taxes, also had high job-creation numbers. That suggests the high-tax advocates are ignoring an important word: "despite." The national economy is improving and most states, high-tax ones and low-tax ones alike, are growing.
True, some tax-hike opponents wrongly predicted doom and gloom when the governor was pitching the increases. That certainly doesn't mean that higher taxes lead to such growth. They simply didn't quash growth as much as expected.
Like Manhattan, California lures people. But wherever rich people live, they are creating more of their wealth in states that don't confiscate so much of it. When taxes go up, a wealthy friend told me, he doesn't cut back on his rather-fixed lifestyle; he just has less money to hire new people and invest in the business.
If that's too hard to grasp, maybe we can try a 95 percent tax on any pundit who believes that tax hikes create jobs — and see how much harder they pull on the handles (or type on their keyboards) to lift their economic bucket.