Tax cuts not solution to job, wage increase

tax taxes money budget stock image

By Morton Marcus

“Come quickly,” the voice was urgent, but unmistakable. Indiana’s third U.S. senator, Phinneas Phogghorn was calling.

In 15 minutes I was at his Driftwood home, one of the 46 he maintains in the state. “What is it?” I said when admitted to his study.

He sat slumped before the fireplace, a whiskey in his hands, a tired old man.

“Son,” he said, “I’ve met my match. A newspaper reporter from Northeast Indiana deflated my balloon, stole my confidence, eradicated my assurance and paid for my coffee.”

“How horrible,” I said.

“You know this tax cut bill before us in the Senate, this great monument to rationality in public finance,” he said.

“Well, my boy, this generous junior journalist questioned me about its effects and subverted my serenity.”

“Say no more,” I said. “Clear thinking always has been a tsunami to your brain waves.

“Let me see if I can reconstruct what this savant said,” I continued. “He told you that there is no way of knowing how firms will use the money they don’t pay in taxes if rates are lowered.

“They may raise wages or give bigger bonuses to bosses. They may increase dividends to stock holders or buy back their stocks in the market. They might buy other companies to decrease competition or lower the costs of production and distribution.”

“Yes,” the saddened, sodden senator said.

“Indeed, corporations could cut prices,” I joked.

“But aren’t firms with more money going to invest and hire more workers?” he asked.

“Maybe, if it’s advantageous to them, but not necessarily,” I said. “They might invest in businesses overseas or in machines that replace people, thus reducing jobs.”

“That’s not what I’ve been hearing in D.C.,” he declared.

“Depends on to whom you listen,” I said.

“Reliable, practical business people who come from Indiana up to my senate office to see me,” he replied.

“Right,” I said. “Those are the people with the money and the time to make the trip to D.C. They’re the people who stand to gain from more money in the corporate cash register. They’re not the workers or the customers or the suppliers of those firms. You’re not hearing from those folks.”

“Well, how do we guarantee more jobs and higher wages?” he asked.

“If you want something done, you have to pay for it. You don’t give money to people and hope they’ll do what you want. If you want jobs created, or if you want higher wages paid, you try tax credits based on performance, not tax cuts that have failed in the past.”

Morton Marcus is an economist, formerly with the Indiana University Kelley School of Business. Send comments to [email protected].