Economy Editorial Response
One of the major policy differences between Republicans and Democrats has been the tax rates that should be levied on high-income earners, especially those for whom the bulk of income comes from investments. Democrats and especially President Obama oppose Bush-era tax cuts and call them unfair and harmful to the economy while Republicans support tax-cuts and claim they contribute towards job creation and economic growth. Tax-cuts should not be extended because the cost to the economy is more than any potential benefits and most of the benefits have been exaggerated by the supporters.
The editorial board of Investors Business Daily (IBD) echoes Republican sentiments that tax hikes on rich would harm both the economy and job-creation processes. The author claims that tax hikes would do little to reduce national deficit while significantly harming small businesses. The damage will be especially done to 1.2 million small businesses who account for 54 percent of all private sector jobs. The author cites Heritage Foundation’s report that these 1.2 million small businesses account for 91 percent of all profits earned by businesses with workers. Other consequences claimed by the Heritage Foundation’s report include shrinking of national GDP by 1.3 percent, declining of employment rate by 0.5 percent, and declining of real after-tax income by 1.8 percent (IBD Editiorials, 2012).
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The claims made by IBD could not have been more exaggerated and the cited source (The Heritage Foundation) is a well-known conservative organization with mostly Republican leanings. First of all, it is an exaggerated claim that tax-cuts lead to job creation because we have seen little impact of Bush-era tax cuts and they have also done little to recover the employment rate in the wake of the financial crisis. As angel investor Nick Hanauer points out, jobs are created by the forces of demand and not tax cuts. Businesses whose products sell well are going to hire more people to meet the rise in demand anyway. Nick also points out that the richest Americans have seen a staggering rise in income levels since 1980 yet the average tax rate for the rich people has only declined over time. Nick also points out that rich people consume a lower proportion of their overall income, thus, tax cuts for rich people add little to economic growth (Hanauer, 2011). Even Warren Buffet calls for higher taxes and one could expect Buffet to not support policies that hurt national economy rather than benefit it because Buffet has been one of the greatest beneficiaries of American capitalism. Even Bruce Bartlett, who worked under Reagan and Bush Senior’s Administrations, argue that if rich people were now paying the tax rate prevalent in 1986 when economy grew at a rate of 3.5 percent, federal revenue would have been higher by $166 billion in 2008 and budget deficit would be lower by 10 percent during the same year (Berlin, 2011).
It is clear that the arguments made in favor of tax-cuts for rich are mostly motivated by self-interests rather than true concern for national interests and are not supported by logic and historical trend. Tax cuts would do little to harm national economic growth or job creation but will go a long way towards reducing budget deficit and national debt. Businesses don’t hire people because of lower tax rates but because of the forces of demand. As long as demand is strong, the businesses will hire people irrespective of tax rate which also explains why low tax rates for high income people have done little to boost employment during the recent financial crisis.
- Berlin, L. (2011, August 24). Why Taxing the Rich Is Good for America. Retrieved March 29, 2013, from http://www.dailyfinance.com/
- Hanauer, N. (2011, November 30). Raise Taxes on Rich to Reward True Job Creators. Retrieved March 29, 2013, from http://www.bloomberg.com
- IBD Editiorials. (2012, November 14). Obama Tax Hikes On Rich Would Shrink Economy, Jobs. Retrieved March 29, 2013, from http://news.investors.com
