Tax increases boost jobs?

23 Jul, 2014 by John Seiler

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Do tax increases boost jobs? Or kill jobs? Here’s the take of David Cay Johnston in the Bee:

Dire predictions about jobs being destroyed spread across California in 2012 as voters debated whether to enact the sales and, for those near the top of the income ladder, stiff income tax increases in Proposition 30. Million-dollar-plus earners face a 3 percentage-point increase on each additional dollar.

“It hurts small business and kills jobs,” warned the Sacramento Taxpayers Association, the National Federation of Independent Business/California, and Joel Fox, president of the Small Business Action Committee.

So what happened after voters approved the tax increases, which took effect at the start of 2013?

Last year California added 410,418 jobs, an increase of 2.8 percent over 2012, significantly better than the 1.8 percent national increase in jobs.

California is home to 12 percent of Americans, but last year it accounted for 17.5 percent of new jobs, Bureau of Labor Statistics data shows.

According to the bio at the end of his piece:

David Cay Johnston, a California native who won a 2001 Pulitzer Prize for his coverage of tax policy, teaches the tax, property and regulatory law of the ancient world at Syracuse University College of Law.

In that case, he should look up what the ancient logicians called a “non sequitur“: “a statement that is not connected in a logical or clear way to anything said before it.”

Tax-increase critics, including yours truly, never said the Prop. 30 tax increase would prevent growth, only that during a recovery jobs growth would be less than it otherwise might be; and during a recession, jobs losses would be greater than under lower taxes.

See the difference?

Growth causes

There also are three major causes for the higher jobs growth:

First, taxes today actually are lower than than during the Great Recession. Remember Gov. Arnold Schwarzenegger’s record $13 billion tax increase of 2009, which “terminated” jobs? When it was expiring, in 2011, new Gov. Jerry Brown tried to extend it. He failed. Then in 2012, as Johnston notes, Prop. 13 passed — but it was $7 billion, just over half Arnold’s tax increase.

California is the only state that has enjoyed a $6 billion tax cut from 2010 to 2014.

Second, we have Silicon Valley, a unique place on earth. But unless you’re a >180 IQ computer entrepreneur billionaire, you can’t afford to live there.

Third, as the Chapman University Economic Forecast has pointed out, and I reported, the jobs upsurge depends to a great extent on construction, which was devastated during the Great Recession. People have to live and work somewhere. So any recovery would mean more construction at higher rates than in other states that never suffered a construction wipeout.

Johnston does concede:

California has a more volatile economy than most of the country. Aerospace, for example, took a big hit after the Berlin Wall came down, and the state has repeatedly experienced other ups and downs larger than the changes in the national economy.

Amazingly, he also writes:

Some research into tax rates indicates that high rates have the opposite effect: People may work harder, trying to make more money to achieve a desired after-tax income and may slough off if tax rates are lowered.

So if you’re already working 80-hour weeks to pay your $4,000 mortgage for a shotgun shack in Orange County, and taxes go up, you’ll be eager to work 100 hours.

Michigan

He also disses my home state:

But as long as the California economy remains vibrant – as long as it does not fall into a pattern of fundamental decline the way Michigan has, for example – the temporary tax increases voters approved in 2012 are unlikely to damage economic growth even if they are made permanent.

Actually, Michigan has been cutting taxes and increasing its pro-business climate, with exemplary results. Outside the disaster of Detroit — which among other leftist follies is punished by a special 2.4 percent extra city income tax, something Johnston should applaud — the Great Lake State has been booming.

Stephen Moore reported:

The Motor City’s meltdown has overshadowed the muscular economic recovery in this region, whose success reflects a manufacturing and technology renaissance. Congress’s Joint Economic Committee reports that manufacturers created 600,000 new jobs in 2013, and western Michigan is one of the places where they’re sprouting the fastest.

The state overall is in the midst of a broad-based economic recovery. According to a 2013 study of Bureau of Labor Statistics data by the state’s Mackinac Center for Public Policy, Michigan has created more than a quarter-million jobs since the official start of the U.S. economic recovery in June 2009—a 7% increase that ranks fifth best in the nation.

Outsiders might attribute the state’s turnaround to the federal auto bailouts—President Obama does—but that’s a small part of the story. This is a healthy, diversified recovery. According to Mackinac’s study, only about 4% of Michigan’s four million jobs are auto-related. Even those jobs are at least as dependent on sales to Honda, Toyota and Mercedes as they are on the sales to GM and Chrysler. International trade is now a big net plus for Michigan. Light manufacturing, information technology and health care have all seen strong job growth.

I don’t know when the next recession will hit. But as with the last one, high-tax California will be ill prepared to weather the storm, like a ship that sails well during light winds but whose sails collapse during a gale.