OPINION: Predicting the fate of Obama’s American Jobs Act
I’m all for taxing the rich. In fact, I fully support increasing their taxes to help cover the federal deficit. But raising taxes to create more jobs is just bad economics.
President Obama recently unveiled his American Jobs Act as an “insurance policy” for the economy. Admittedly, the act does a lot of good things. It invests in education, gives tax breaks for small business owners and creates hiring incentives for employers. What is not headlined is increased taxes on the wealthy are what funds it. I know that taxing the rich to create opportunities for the unemployed seems like a logical thing to do, but the reality is that it’s just bad economics.
In late 2005, a memo from the financial service giant Citigroup was leaked into the public. The main focus of the 30-page memo was on what they called plutonomy, or a society ruled by the rich. While the memo justly outraged the public, because it portrayed plutonomy in a positive light, it did shed some light on what is known as the “wealth effect” in economics. The wealth effect states, quite simply, that the wealthier you are, the more you spend, and the less you save. According to the Citigroup memo for example, in 1992, the savings rate among the top 20 percent of earners was at 8 percent. In 2000, after the economic boom of the ‘90s, the savings rate dropped to minus 2 percent. In other words, as the top 20 percent grew wealthier, they began spending more and saving less.
As much as we on the right like to bash Keynesian economics, Keynes was right that spending is the lifeblood of the economy. Increased spending means that people are buying more goods and services, and businesses need to hire more people to create those goods and services. The wealth effect is a good thing, because it increases spending and thus employment.
When President Obama increases taxes on the rich to fund his American Jobs Act, he will be counteracting the wealth effect. The wealthy will save rather than spend more. If an increase in spending equates to an increase in employment, it goes without saying that an increase in saving creates more unemployment. Average workers all across America will lose their jobs to fund the American Jobs Act. Ironic isn’t it? Even if we don’t like it, the wealthiest 1 percent controls more capital than the bottom 90 percent of the country. Citigroup was right, the extremely wealthy are the primary drivers of this economy and we need them to spend their money.
Those in favor of taxing the rich often cite the fact that the Clinton administration had some of the sharpest tax increases on the rich in history, and created 22 million jobs. Bush on the other hand cut taxes and only created 6 million. While these are indeed true facts, it is far too simplistic to say that these jobs are due solely to tax policies. After all, Reagan created 18 million jobs with policies similar to Bush. Total job creation is too complex a puzzle to pin on a single president or economic policy, and often there is no definitive answer. However, there are some things we know don’t help; raising taxes is one of them.
The American Jobs Act won’t create new jobs; it will shoot America in the foot.