Tax Cuts - Creating Jobs Or Poverty ?

At the end of this year the payroll tax cuts for American workers will expire. If they are not continued by the Congress, that means the average worker will have about $1,000 less in their paychecks next year. The Republicans have already killed an extension of the payroll tax cut once in the Senate, but now the Democrats are bringing it up again. The Senate Democrats now want to up the cut to an average of $1,500 a year, and pay for it with a combination of  a surtax on millionaires and an increase in the fees that Freddie Mac and Fannie Mae charge mortgage lenders.

The new fees on Freddie Mac and Fannie Mae are a bone the Democrats are throwing to Republicans (who think both organizations are the spawn of the devil). I doubt it will be enough to get any Republicans to back the bill though. While Democrats think the payroll tax cuts will create new jobs, the Republicans are convinced that the only way to create new jobs is to give a tax cut only to the rich. So who is right? Will a tax cut for the rich create jobs or will a payroll tax cut for workers create jobs? Do tax cuts create jobs at all?


To figure that out we have to understand what it is that actually spurs the growth in jobs. It is an increase in the demand for goods/services. If that demand increases then entrepreneurs will hire new workers and/or create new companies  (which would also need new workers) so they can meet that new demand. But if demand does not increase, then it would be silly for companies to hire new workers (since they are not needed and would just cut into profits). And if demand decreases, then layoffs can be expected (because less workers are needed to meet less demand for goods/services). That is simple economics and is understood by any successful business person.

So to understand whether tax cuts create jobs, we must first determine if those tax cuts create more demand. Let us first examine the Republican position -- that tax cuts for the rich (or corporations) will create jobs. This is unlikely to create any demand at all. The rich already have plenty of money to buy anything they want, and any extra money will just sit in their bank accounts -- where it will not create demand because it is not being spent. And the same can be said for corporations since they are already sitting on trillions of dollars (and not creating jobs because demand for their products/services is not increasing). And there are not enough rich people to significantly effect demand, even if they did spend a little more.

How about payroll tax cuts? Will it create demand? Probably so. Consider that there are about 150 million workers who are still lucky enough to have jobs. Giving them an average of about $1,000 more in their take-home pay means they will, as a whole, have about $150 billion more to spend. And they will spend it since most workers are having a harder time meeting their financial obligations in this recession. Once spent, that money will turn over in the economy several times (at least three times) creating about $450 billion or more of new spending. That's not enough to solve all our economic problems, but it is enough to significantly effect demand -- and therefore it is likely to spur at least some job creation.

So we can see that there is a difference in who gets the tax cuts, at least as far as job growth is concerned. This time the Democrats are right. Putting money into the hands of a large number of people who virtually have to spend that money can increase demand, and that increase in demand can have a positive effect on job creation.

But the Republicans have it backwards. Giving new tax cuts to people who don't need them will take money out of the economy (because it will just sit in already-fat bank accounts). It will not create new jobs, and may actually inhibit job growth because there is less money in the economy being circulated. This will force more of the jobless into poverty as their benefits run out. So we can see that the graphic at the top of this post (from Armchair Patriots) is correct. Because of their backwards economic policies, the Republicans are actually poverty creators -- not job creators.