Is There a Connection Between Reducing Taxes and Creating Jobs?

BY busadmin  February 24, 2009 at 4:07 PM EST

President Barack Obama; file photo

Question/Comment: Simple question. President Obama and all members of Congress say the “stimulus bill must contain only monies targeted directly for job creation”.

Given that the stimulus bill now has 60 percent allocated for tax reductions, please explain the direct connection between reducing taxes and creating jobs. At this point, it appears to me the “connection” is merely theoretical, and is patently disproved by recent history.

Paul Solman: There is considerable controversy over the extent to which any stimulus – spending OR tax cuts – will create more jobs than would have been created in their absence. At some level, the problem is philosophical. Yes, the past is prologue (to the present and future), but the present and future are unique, and may well fail to reflect that past, much less repeat it. So neither “recent history” nor the not-so-recent past proves anything about what is passing or to come.

More muddlesome still, we can’t run experiments within history itself. How can we ever know if more jobs WOULD HAVE BEEN created had there, or had there not, been tax cuts, spending surges, etc?

That said, the reasoning is as follows: Consumers aren’t spending on the goods and services America has the people and resources to produce. Businesses aren’t either. Nor foreigners. As a result, more and more of those people and resources (factories, raw materials) are being idled. How else to remobilize them if not to get money into the economy? That’s government’s job at this point.

There are two ways to do it. One is for government to SPEND, thus PAYING people to mobilize. Another is to GIVE THEM money, goading them to spend. Since people already pay money to government via taxes, the easiest way to give them government money is by telling them to pay LESS. Thus, tax cuts.

The argument AGAINST tax cuts: people will save the money instead of spending it. But that could happen if they were PAID by government as well. A lot of the current argument is over which method of getting money to people – government jobs or tax cuts – is more likely to get people spending.