Taxes and Employment

With the debt ceiling issue shelved (temporarily, I mean three months is no time at all) most eyes turn towards tax policy now. There are enough games played regarding language right now, “Tax reform” v. “Tax relief” v. “Tax cuts”, that it would seem we are in for an extended debate, or a really long argument. With leadership apparently content to draft plans outside of the committee process there seems to be little chance to quell discontent from within their own party.

However, I want to focus on a question from last week’s radio show. A caller asked me if corporate tax reductions will create employment growth. The short answer is, it could, but there are several (potentially catastrophic) assumptions underlying that answer. The critical assumption becomes, what do companies do with the gains? We can leave it out for now, but there are uneven gains from tax changes across industries that could be important drivers of the overall outcome, and certainly could drive regional outcomes. If companies decide to use increased profits to hire more workers, there is your employment The way I see it there are a few options:

  1. Companies keep the funds on their balance sheet and do nothing,
  2. Companies buy back shares,
  3. Companies pay more in dividends,
  4. Companies reinvest in the business and hire more workers.

Only one of these outcomes leads to a clear and direct effect on employment (or unemployment). Tax reform is important, but suggesting it will create jobs is a bit of an oversell. Even the 1986 tax reform did not do this as these pictures show.

The level of unemployment was already on the decline prior to reform and started increasing in 1990.

The level of employment started its increase prior to 1986 and did not really change trajectory after enactment of tax reform.

Even when accounting for population, albeit roughly, there is little change in the data that we could attribute to the 1986 tax reform as shown in the employment to population ratio.

Tax reform is worthwhile and important as a policy goal, but suggesting it will do things it has not in the past, and that rely on assumptions you have little control over, do not help your policy credibility and do little to effect meaningful changes.

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