How Tax Cuts Increase Employment

Perhaps with the "Bush tax cuts for the rich" in mind, a recent Providence Journal editorial takes on the "belief" that cutting "companies' or individual proprietors' taxes" will lead to job growth:

The incentive to hire more people comes when demand for a company's goods and/or services increases. Then, with the expectation that higher revenues will mean higher profits for owners, big bonuses for senior managers and so on, more people get hired to meet demand.

With declining inflation-adjusted salaries, vast consumer debt, globalization (which drives down U.S. wages) and more and more use of technology to reduce staffing, it's difficult to see where demand-spawned hiring will come from. A better educated and healthier populace, and better national physical and educational infrastructure, would make America more globally competitive, thus helping to create wealth — and so boosting demand. But many Americans, apparently, would prefer more tax cuts rather than pay to address what's above (let alone deal with the deficit) — although 30 years of income-tax cuts don't seem to have improved middle-class standards of living; they have fallen.

There's an interesting conceptual double standard to the editors' argument. On the one hand, the only job growth that they'll apparently tally for jobs attributable to tax cuts is that which comes directly from the benefiting company using its additional funds to hire more people. On the other, expending public revenue on general environment-setting things such as education and infrastructure is thought to be a better approach. Personally, I think both should be done: taxes should be cut, and a greater percentage of government dollars should go to the basics. But on the narrower question, the essay seems to me to miss some important considerations.

First of all, job growth isn't entirely a reactive response to increasing demand. Dynamic companies have to innovate and expand, taking risks on new lines of businesses or additional products. That takes an investment in personnel who aren't serving a consumer base that's already in the store.

Second of all, and more importantly, easing taxes helps to clear the route — and increases the financial incentive — for those who don't already own and run companies to break off and do so, competing for the same customers or offering offshoot goods and services. When they do so, they not only open up the jobs that they'd previously held, but they begin to require new employees to populate their ventures.

Lastly, it's curious that the editors don't appear to see the effect of taxation on "salaries, vast consumer debt, [and] globalization." Lower taxes allow people to keep more of their salaries, some of which they can use to pay off their debt, or avoid getting into debt in the first place. Watching the taxes that float away in my paycheck, bump up my mortgage payment, and increase the cost of goods and services that I buy, I'm acutely aware that they come to more than the delta between what I make and what I need to make to begin moving from borrower to saver. With respect to globalization, the greater the taxes associated with each American employee (payroll and income), the more expensive the workforce becomes, and the more incentive the business has to look for alternatives.

I know, I know. The Projo editors are only talking about the taxes of Americans who aren't in my financial straits. But their position bespeaks an entire mentality that, like taxation, tends to apply across the economic spectrum.