Home > finance, news, rant > Do higher taxes kill jobs?

Do higher taxes kill jobs?

September 21, 2011

Being a mathematician, I find myself forced to consider statements like “higher taxes kill jobs” as statements of theorems with missing stated assumptions. How could you fill in the assumptions and prove this theorem?

First I think about extreme cases- sometimes extreme situations need fewer assumptions, they kind of spill out as obvious. So here’s one, the tax rate is at 80%, what would happen if we raised taxes? My first reaction is, 80%!? That must mean you have way too much government and regulation and for those reasons businesses are probably already quite pinned down and don’t have lots of freedom- don’t tax them more, that will make their good ideas (if they have them) all the more suffocated. Just think of the paperwork you’d need to go through in a society that government-heavy, to hire someone.

What’s another extreme case? How about taxes are super low, more like fees for doing business. Then no, I don’t think raising them a moderate amount would kill jobs at all, in fact it may introduce enough government to make things less wild west and safer for businesses to operate.

So in other words at some level I buy the anti-regulation anti-government angle. I don’t want super duper high taxes because I think it encourages too much bureaucracy and that stuff is boring (but some amount of it is necessary to make things safe).

Moreover I’m assuming that governments generally use taxes to protect people from food poisoning and the like, regulate to force companies to play fair, and as social safety nets when things go bad, and that they’re not particularly efficient. Those of course are my assumptions, which anyone can disagree with.

But in terms of proving my theorem, I’m stuck thinking it’s more like, there’s some point in between very low and very high taxes where it gradually becomes true that raising taxes more will indeed start to kill jobs.

How about our situation now? Right now we have pretty low taxes by historical measures, and moreover the known loopholes mean that businesses (especially big ones with fancy lawyers) pay much less than their stated tax rate.

Why, in this case, would a moderate bump in their tax rates kill jobs?

Here’s a possible argument: if higher taxes actually encourage more regulation, then that could be a major problem for smaller businesses, who don’t have the margin for dealing with hiring that many lawyers for compliance issues. Although this article argues that “regulation kills jobs” is an invalid statement in general.

Pet peeve of mine: when you hear conservatives talk about killing jobs, they often frame it in terms of struggling small businesses, often run by a woman. But it’s easy enough to imagine that we introduce taxes and regulation that are easier for small businesses to avoid smothering them. It’s really the huge businesses that we want to see start hiring, and it’s the huge businesses that pay so little taxes.

Here’s another one: if you raise taxes people will spend their cash on taxes instead of hiring people. But wait, that doesn’t apply right now when we have so much frigging cash on hand (and hidden in other countries). In other words, companies are not not hiring people for cash flow reasons, it’s because they don’t see the demand.

In the end I can’t see how to prove or even argue that theorem, assuming today’s conditions. Would love to hear the argument I’m missing.

Categories: finance, news, rant
  1. September 21, 2011 at 8:50 am

    Your extreme-case analysis is very reminiscent of the (hypothetical) Laffer curve: http://en.wikipedia.org/wiki/Laffer_curve

  2. Aaron
    September 21, 2011 at 12:45 pm

    You have conflated two different things: the raising of the tax rate (or elimination of loopholes) and the addition of regulations. They are both corrolated with bigger government, and the tax code can be used in lieu of other regulations to affect behavior, but they really are two separate issues.

    If we truly care about debts and deficits, then higher taxes shouldn’t grow the government faster than usual unless we have cleared the the debt and have a budget surplus. We have no risk of that right now. The question is, how large does the deficit need to be before it is politically expedient not to increase government spending?

  3. September 22, 2011 at 3:35 am

    Economics is not maths. It isn’t even physics. In particular, as Karl Marx observed, one cannot really take the politics out of political economy. It is a social science so if society organises itself differently the economics change. We can gain a second insight into economics by observing Marx rather than listening to him: since many of those talking about economics are politically active, they will gloss their economic statements with polemic (if you want to be kind in your description of them) or propaganda (if you don’t).

    What do people mean when they say ‘higher taxes kill jobs’. The slogan has at least three meanings (and the people who use it are careful not to disambiguate; those who want to understand, rather than frighten, are generally more moderate in their language).

    Are we talking about ‘If Government Expenditure as a proportion of GDP is higher there will be fewer jobs’? If so we note that Government expenditure creates jobs in bureaucracy while private companies create jobs in the private sector. However we should also note that small organisations, requiring less overhead for administration, tend to create more jobs per buck than large ones. However it won’t make much difference if you transfer the money from the government to a multinational mega-corporation which is as large or larger that the state apparatus.

    Are we talking about ‘High marginal rates of income tax kill jobs’. In the mid 1970s marginal tax rates in the UK reached 98% (as documented in songs such as ‘Taxman’ by the Beatles and ‘Sunny Afternoon’ by The Kinks). We can observe that this was a disincentive for entrepreneurs to operate in the UK, and did encourage business to move abroad. On the other hand we can see that when the highest marginal tax rates are well below 50%, other issues dominate the choice of location by high earning individuals (because the proportion of there income taxed at the high rate are small’ Clearly, sufficiently high marginal rates of income tax do kill (or rather export) jobs, but no countries have such high rates currently. (Also if the number of tax bands increases, administration costs for income tax increases, and non-productive administration can crowd production out of the economy and stifle growth).

    Are we talking about high rates of indirect taxation: sales taxes, property taxes, and the like? Since these taxes will increase prices, they are likely to encourage people to make fewer purchases and my reduce the velocity of money through the economy. This will certainly kill jobs because with fewer transactions, fewer people are required to process them. However, what is the sensitivity to small changes in the rate of indirect taxation?

    My attitude to slogans in political economy is greatly influenced by an observation by J.K.Galbraith about the slogan ‘No taxation without representation’ which was used to encourage Americans to fight for independence from Britain. He notes, that even though the logic of the slogan is unassailable, those who coined it were not keen on taxation with representation either.

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