Lower Business Taxes Don’t Stimulate Hiring

by Morton Marcus
Retired Economist
Indiana University

“I am so proud,” Puffy Possum says as we wait for our lunch orders. “Mighty proud indeed,” he intones, “to live in this great land where an educated electorate has chosen ladies and gentlemen of fine judgment to serve in public offices where they boldly take steps to resolve the most pressing problems of our trying times.”
“And what might those ‘most pressing problems’ be, Puffy,” I ask.
“Jobs,” Puffy responds. “Jobs are the essential necessity of every era. People need work. A job is the foundation of self-esteem, the linchpin for connecting to the community, the instrument by and through which the individual connects with the greater international marketplace and derives the income that provides security for the family. A job is identity, the credential for health insurance, the badge of respectability, the affirmation of personal morality.”
Our orders have arrived. I turn my attention to the bowl of chili before me while Puffy admires his red, white and bleu burger (bleu cheese and horseradish sauce on a very rare half-pound of ground beef). “And,” I ask, “What makes you so proud?”
“These sensational proposals from Indianapolis and Washington,” Puffy says as he plans to attack his burger. “I admire the legislative bodies that propose to increases jobs by reducing or keeping low taxes on businesses, particularly small business—the heart of American capitalism.”
“Some folks,” I say, “would call small business the heartburn, heart ache, or heart attack of American business.”
“Fallacious, fatuous and fractious,” he says.
“Nonetheless,” say I, “it’s very unlikely that small businesses will hire workers because of the tax breaks politicians want to throw at them. Neither Democrats nor Republicans realize that the demand for workers is based on or derived from the sales of the firm. If customers are not buying more, the firm has no incentive to hire more.
“Lowering the cost to business of hiring new workers sounds great. But how much of a tax break is needed to get the firm to hire a worker? The incentives being offered are trivial compared to the cost of an added worker. If there were enough business to hire that worker, the company would probably do it without any push from the government.
“Indiana just voted to forestall increasing the unemployment compensation tax on business. That will amount to a savings of approximately $140 per worker over the course of a year. A firm would need more than 100 workers to have saved enough money to hire one worker at $15,000 per year. Since when does a small firm have 100 workers?”
“Now, now,” says Puffy, “some of the finest, sharpest, most informed leaders in the state supported that bill.”
“They supported keeping taxes on business low,” I retort. “That means all companies, large and small pay less in taxes regardless of their hiring efforts. There is nothing that says that if companies have lower taxes they will hire more workers, cut prices, increase dividends, or raise wages. They may do some or none of those things. They may just sit on the money, enjoying larger cash reserves, or they may pay bigger bonuses to executives.”
“Everyone knows,” Puffy starts to say…
“What everyone should know,” I interrupt, “is that we don’t know what any given tax cut or increase will do at any specific point in time. We have theory, but not knowledge. It’s wonderful so many politicians subscribe to theory. It’s a shame they are so ignorant of reality.”
Puffy does not like these statements and turns to talk with people at the next table. I focus on my developing indigestion.