Study and Conclusive Evidence on Why Raising Taxes Creates Jobs

The study below directly negates the Republican argument that raising tax rates leads to negative job growth. It’s one of the central themes of their campaign (raising taxes kills jobs). In reality, when looked at correctly, the evidence proves just the opposite to be true. This is the only study that proves this in a way most everyone with basic business knowledge can understand. I hope someone can get this point across to the American people to counter their arguments.

For proof, you can download the spreadsheet that created the numbers that backs up the theory. It has all of the proof and evidence needed to run your own analysis and reach your own conclusions.

When you boil everything down, Republicans really only have four main messages: 1) Democrats want to kill babies (when overpopulation is humanity's #1 problem), 2) We'll keep you safe (even though King George probably perpetrated 9/11 so they could go into Iraq to steal their oil and scare people into giving their dynasties more power to abuse), 3) God will send you to hell for all eternity if you vote Democrat, and 4) Raising your taxes will result in less jobs. Nothing can really be done about the first three, but now the fourth can easily be debunked. If the Dems finally do this, then we'll get millions of more votes - forever.

Millions of people never vote Democrat just because of the fourth point that nobody ever disproves. There is a talking head on TV a dozen times per day spewing the lie, so y'all need to refute the Republican's main claim that higher taxes kills job growth once and for all ASAP! If you had an ad or someone on TV saying this wasn't so every time they make the claim, and here's the logic and the proof, then you'd never lose another general election ever again. What y'all need to do is have a press conference where Obama introduces Volcker, and then he explains these concepts in a way the average Republican can understand. Just come right out and say, "The reason for this press conference is to prove that raising taxes does not result in job losses - in fact just the opposite." You'll get everyone's attention because Republicans have drilled this lie into people's heads for so many decades, that they just assume it's true (99% of Americans think that the Republicans are correct when they say higher taxes will increase unemployment. They're clueless about complex economic issues, so it's not their fault. It's the Dem's job to prove them wrong, and until Obama, y'all have failed miserably!).

There are also some pasted market comparisons that you will find helpful here. The first page shows the average growth of the S&P500 since the month Clinton was elected to the month Bush II was "elected." The S&P500 had an annual average rate of return of 17.6%. The next paste show the average growth of the S&P500 since the month Bush II was elected until the end of September 2008: The S&P500 had an annual average rate of return of -0.81%.  So one would have lost over 6% by investing in stocks during Republican domination, and gained ~270% under Dems. In other words, if you would have invested $10,000 around the time of Clinton's election and sold around the time of Bush's first stolen election, you would have had around $37,000. If you would have invested $10,000 around the time Bush stole the 2000 election, you would have around $9,000 today. The point is these time frames are about the same, so the difference reflects solely on the different economic theories. The flawed policy favors giving as much as possible to the rich (because it would supposedly "trickle down" to everyone) which not only didn't work, but caused record job losses, 45% more inflation, two recessions, less GDP growth, a plunging dollar, soaring energy and health care costs, more federal debt than all other previous presidents combined in our history, and deregulation that caused the worst financial crisis since the great depression (and the results were about the same during the Reagan/Bush era when this all started. The sporadic "prosperity" of the 80's was caused mostly by the personal computer, not Reaganomics). The better policy created unprecedented new wealth, record new jobs, less inflation, high economic growth, and more paying off of federal debt than in any time in our history. I'm glad to see Obama finally hitting home runs with these facts for a change - that's how to win elections.

The bottom line is that the Republicans have always been terrible when it comes to the economy. It's ironic that even rich people make many times more in increased income due to better economic conditions than the increased taxes they pay. But even after decades, they never learn. This is mostly because the Dems are too lame in getting the point across - that is until Obama. There's a reason why their color is red. That's because it's what you'll be seeing when elected - the color of your own life blood dripping out both in never-ending wars and in perpetual economic losses.

The third and fourth pastes show the difference in the Goldman Sachs Commodity Index (a measure of core inflation) during Dem vs. GOP during the same time frames. Core inflation rose at an annual rate of 6.08% under Dems and 8.76% under the GOP. This is 44% difference! Perpetual increases in costs of living, wages and benefits going down every year forever, debt mounting at an unprecedented rate - this is how the middle class is being exterminated. The biggest reason for the bad stock market performance is because average Americans don't have any money to invest in their 401(k)s anymore. Until this is fixed, the stock markets will never go back up again - ever!

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Sorry this took so long. I did similar things in '04 and was ignored (and then even harassed by the Republicans!). This time, I hope y'all are intelligent enough to use my expertise to help win.

I can go on and on until the cows come home about things like this. Please feel free to use me as a common sense resource. Y'all are still not getting it on several fronts and need the help.

In case you didn't see the whole site (which I did myself), I'm one of the best investment managers ever. For example, since 1/1/99, I beat the S&P 500 by +7.2% (or 638% better). I doubt you'll ever see anyone with that kind of a track record. I'm full of unique ideas to help you, that your flock of economic and financial geniuses have ignored.

BTW - I'm very happy to see my hero Paul Volcker on your team! He was the best Fed Chairman in U.S. history and is the reason I got into the financial biz back in 1986. He personally answered two letters I sent to him while he was Fed Chairman. Because of him, I changed my college major from electronics engineering to economics. Please let him know I said hello, I'm very happy to see he's doing well and helping the good guys again. I tried contacting him over the years and found no contact info. If he has any jobs or needs help or an assistant for anything, I volunteer. GoBama and long live Paul Volcker - the wisest financial mind humanity has ever seen!

Please let me know if any of this is helpful. I can go on forever if someone asks. The Republicans HAVE TO GO and have to stay gone forever!!! They screwed up everything. Just ask yourself - what didn't they screw up with their lies, deceptions, intolerance, and hate just so rich people can pay less taxes? I can't think of a single thing. Good luck to us all, we need it.

Please note that this page is not in Google's index, nor is there a link to it on the main site, so nobody is seeing it unless someone tells them about it. It will also be taken down after the election because most customers are Republicans. The point is to help the Obama campaign refute the Republican's claim that taxes kills jobs.

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Why Raising Taxes Creates Jobs

First, why lowering/eliminating taxes on dividend income creates negative job growth: Put yourself in the position of the CFO and imagine you have to decide what to do with a surplus of net earnings. The usual choice is to either pay it out as dividends, or retain it. By retaining it, you invest in future growth by purchasing new and more efficient plant and equipment. Increased employment is usually associated with these activities. But then the Republicans eliminate taxes on dividends. Now the markets are bidding up the prices of dividend-paying stocks because more people want to own them (especially when bond interest rates are so low). Everyone is pressuring you to join the herd by paying net earnings out to shareholders, so your stock won’t be left behind. Being senior management, owner of your company’s shares, and more than likely a Republican, you’re all for it. So the money is all paid out as dividends at the expense of future company expansion. New employees that would have been hired as the business expands are not employed, and existing employment may even be reduced. Because of the multiplier effect, even more jobs are lost when new plant and equipment is not purchased from vendors. To make things even worse, there is also a bidding war to see which firm in your industry can pay the most in dividends. CFOs are immediately rewarded for their decisions. But stocks of these companies will only go up in the short-run. Over the long term, companies that don’t make profitable expansion investment will eventually become less competitive and more vulnerable to international competition. Americans lose jobs, economic growth slows, industrial capacity diminishes, and America loses business to foreign firms. Long-run supply has been reduced because of supply-side economic policies – the opposite of what their proponents say will happen. Everybody loses except owners of dividend paying stocks, and the brokers that sell them (mostly all Republicans). This is exactly what has happened since the lowering of dividend taxes by the Republicans.

Now, the bottom line on why lowering tax rates creates negative employment: If the effective tax rate companies pay is reduced from 40% to 20%, real employee expense rises by one third. This is because employee costs are tax deductible, and the lower the tax rate, the lower the amount of tax savings.

First let's debunk the Republican argument that lowering taxes creates more jobs. The logic of the Republican's argument goes like this: If you lower taxes, then the company will have more net income. The more net income, the more money is available to hire more people. This is false and is easy to disprove by looking at what any corporation does when they have more net income. What they do is distribute it to shareholders in the form of dividends, pay enormous bonuses to people at the top, invest in capital equipment, and throw expensive parties and indulge in luxuries to compensate management for doing such a great job. What they do not do is invest in humans in the form of hiring more people, paying employees more, nor providing more benefits. Why not? Because when taxes are low, companies don't need more tax deductible expenses. To the corporation, humans are really only three things - a necessary evil to get work done, the biggest expense, and a tax deduction. Taxes are not the problem when they're low, so it's not the focus of attention. The only reasons they invest more in humans is if they really really need to get more work done, or if they need more deductible expenses to lower taxable income. When taxes are low, and there's a huge pot of money laying around after expenses, business do not just employ more people for the good of humanity (which is what Republicans say happens with the pot of excess money). They pay it out to shareholders, top management, invest in equipment, and throw huge parties. They only employ more people when every other option has been exhausted (automation, temps, making salaried people work 100 hours per week, outsourcing, etc.). Employees are most company's largest expense - so they don't hire new people unless they have no choice.

Now refer to the chart below. Please use the free MS Excel spreadsheet to plug in your own numbers, and you’ll see the effect is the about the same in most all employee gross income and tax rate scenarios. You can download it from here: http://toolsformoney.com/tax.xls

The numbers in the analysis below came from the chart above.

Quick bottom line: If you reduce tax rates form 40% to 20%, the cost of an employee goes up by 33%, and vice versa.

Imagine you're a small business owner, working 80 hours per week, making $500,000 per year, and your tax rate is 20%. It doesn't matter which legal form of business it is, because in the end, businesses don't really pay taxes - people do.

When tax rates are low (20%), you have incentive to keep working yourself, and everybody else on salary to death with long hours, because every dollar spent on employees’ only returns twenty cents in tax savings. So the lower the tax rate, the less valuable the employee expense tax deduction becomes. When taxes are higher, you have more incentive to hire more workers because you get more money back in taxes.

When taxes are high, what people want are tax deductions to lower total tax expense. Since employees are usually the largest tax-deductible expense, this is the most logical thing to do to lower taxes (hire more people, increase hours worked, or increase benefits). So the higher the tax rate, the more incentive employers have to increase employment - and vice versa. This is the exact opposite of what Republicans use as their #1 talking point (raising taxes kills jobs). This Republican myth needs to be stopped once and for all ASAP. Looking at how many jobs were created during the Clinton Administration vs. how many were lost during the second Bush Administration proves the point best.

For example, assuming a 20% tax rate, an employee with a total gross annual expense of $25,000 really only costs $20,000, because $5,000 is saved in taxes. At 30%, this employee really only costs $17,500, because you get $7,500 back in taxes. So the 10% increase in the tax rate made this employee 12.5% cheaper in actual dollars spent by the firm. This also makes the employee more profitable to employ, since their efforts have to recoup 12.5% less revenue to break even. The lower this break even hurdle rate, the more the employer is likely to take on the risk of hiring a new employee.

As you input various scenarios into the spreadsheet, you’ll see that for every 1% decrease in the tax rate, employees become about 1.5% more expensive. This means that even though the company saved 1% in taxes, it costs them 1.5% more in employee expense. Because total employee expense is usually many times more than total tax expense, the amount of money the company loses due to lower tax rates is several times more than just this difference of 0.5%. Just the compounding effect of this difference (shown in the far right column of the spreadsheet) makes employee expense rise by one third when a 40% tax rate drops to 20%. Again, because employee expense is usually many times more than tax expense, the effect is magnified several-fold. This creates a huge incentive to minimize employees as the tax rate declines (and vice versa).  There is a chart on the spreadsheet that couldn't be pasted in here because I forgot the password to unprotect the spreadsheet (if people care, then I'll fix that).

The way to have your cake and eat it too (get the tax savings and not pay more in employee expense), is to decrease employment. This is done both by reducing payrolls, not giving raises, reducing benefits, and making salaried employees work harder and more hours. Getting the same, or more, work done with the same employee expense, raises reported overall productivity numbers. This is not a good thing, contrary to the boasting of Republican pundits, and is clearly today’s reality (record increasing productivity numbers over the last several years).

With Clinton-era tax rates, the desire to work yourself and salaried employees to death, was much less attractive. He found an equilibrium point where employment makes money instead of losing money. Employers could afford to hire more, and could then focus on more important entrepreneurial activities (instead of doing the mundane work of lower-level employees). This is one of the factors that contributed to the enormous success of President Clinton’s economic policies. It’s also why we went from prosperity to misery in such a short time in 2000. Republicans like to say they inherited a bad economy, and they like to stir up patriotic feelings by blaming the 9/11 attacks, and the bursting of the high-tech bubble for their recession and persistent sluggish growth. But the economic impact of these events could have been short-lived and much less significant, if it wasn’t for the damage done by bad long-term tax and fiscal policies. I don’t think it was a coincidence that the economy started its downhill slide right after the election (smart people pulled in their horns as soon as they realized another Bush-led Republican economy was coming). We would have recovered from 9/11 and the high-tech collapse early in 2002 if it wasn’t for bad tax and fiscal policies.

Just because of domestic population growth and new entrants to the labor markets, it takes over 150,000 new jobs every month just to have net employment gains. So every month when the number is less than that, net jobs are lost. There have been very few months with numbers over 150,000 since this President stole office. So far about 6,000,000 net jobs have been lost since his policies have been implemented. This is by far the worst performance by any administration ever – even worse than Herbert Hoover during the Great Depression! In contrast, when President Clinton was in office, 200,000 new net monthly jobs were considered low, and most months showed over 300,000. I hope you can see that this difference was mostly because of lower tax rates.

Because of the ways in which President Bush cut taxes, the only things stimulated are pink slips, foreclosures, repossessions, bankruptcy filings, and the financial accounts of people that don't need, or won’t spend, their newly found wealth. This does nothing but bad things for the economy, both short- and long-term.

In conclusion, the only results of the current administration’s economic policies are persistent high unemployment, sluggish growth, and budget deficits that will be out of control for decades. These problems will remain until most all of their tax cuts are permanently repealed.

Thanks.

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