Most of the people you ask this question to won’t understand what you just asked them, but it’s a question I propose to my “tax cuts create jobs” friends pretty often.
See, say you cut taxes where someone like Mitt Romney wanted to, down to a rate around 25%. This may boost profits for a short period of time, and some businesses might even create a few jobs, but eventually you max out the growth in revenue at this tax rate and the only option we would have (using the conservative belief of tax cuts for job creation) is to cut taxes again.
Say we knock them down to 20%, then 15%, then 10%, then 5%, then 2.5% — you get the picture — what do we do once we’re at a point where you can no longer “cut taxes to create jobs?”
And this doesn’t even address the massive problem of tax revenue being at such low levels a country can not sustain itself. But that’s a whole other article for another day.
It’s similar to a question I posed to a manager when I worked at Sam’s Club. Like with most large companies, they “cut wages” to help lower expenses. I’d often say that’s all well and good, but what do you do once you’ve squeezed all the juice from that lemon? There’s a specific amount of people that must be present at a business in order for it to run. You simply can’t cut everyone. While you might work the ones you don’t cut more, there’s still a certain amount of people that must be kept on the clock to run a business. So once these businesses cut to a point where they can no longer make those “expense saving cuts”—then what?
I feel the same way with taxes. If your main plan to create jobs is by cutting taxes, what do you do once you can no longer cut taxes?
The truth is, tax cuts have little to do with job creation. A simple and indisputable rule of economics is the rule of demand. If there’s demand for a product or service, a business will be created to meet that demand. It will grow and expand in accordance with what demand dictates, not what their tax rates are.
For example, if I could wave my magic wand and offer a 0% across the board tax rate for a business to manufacture VHS tapes, would this business be highly profitable because of its low taxes or would it be a massive failure because there’s no demand for VHS tapes in 2013?
Even if I poured millions into advertising and infrastructure, without demand, it doesn’t matter if the business was handed a tax rate of 50% or of 0%—it’s not going to grow. It’s not going to hire new employees. It’s not going to be in business for very long without losing a massive amount of money.
On the flip side, if I had a business that had a 40% tax rate, but massive demand for a product, I promise you a potential business owner isn’t going to decide, “Well, I‘ll only make $200 million with higher taxes, not $350 million, so I’m not going to start this business.” Nor will a business choose not to expand, losing revenue, because its taxes are higher.
It might complain and lobby for lower taxes, but when demand for a product is there, very few businesses are going to lose out on meeting that demand (and risk losing their share of the market to competition) just because taxes are higher.
If demand dictates a business must grow—it will.
Trust me, companies don’t create jobs based on their tax rates. I’ve never seen a single company expand just because they got a tax break. You won’t see a CEO say, “Even though there’s no need to expand, we got a tax cut so let’s hire new employees even though we don’t need them.”
Big corporations and the rich can whine all they want about tax breaks being necessary for job creation, but they know it’s a lie.
It’s just basic economics. Jobs are created by demand, not tax breaks.