Commentary | Economic Growth

Tax cuts won’t create jobs

The theory of tax cuts as economic stimulus has been put to the test – and failed – twice in the past six years alone. As the prolonged recession leads more people to once again consider these same old tried-and-failed policies, it is important to revisit recent history.

Less than half the personal tax cuts — especially the types of high-end tax cuts favored by conservatives — are likely to be spent in the first two years. Most of it will be used to pay down debt, build savings, or buy imports – all uses of money that do not boost the U.S. economy.

Consider the $100 billion in personal tax rebates that were issued as part of a broader economic stimulus effort in 2008. Only about one-third of the total amount was spent. A University of Michigan study in December 2008 concluded that these rebates provided “little ‘bang for the buck’ as economic stimulus.”

Similarly, a series of tax cuts in 2003 fell far short of targeted job growth. The Bush administration claimed the tax cuts would create 1.4 million jobs, in addition to some 4.1 million jobs expected to be generated over an 18-month period. But EPI tracked the initiative and found that not only did the additional 1.4 million jobs not appear, but the 4.1 million jobs that had been expected without the tax cuts never materialized either. By the end, the economy only saw an additional 2.4 million jobs added to the economy.

In other words, by the Bush administration’s own metrics, the tax cuts specifically designed to create jobs fell short by a staggering 3.1 million jobs.
If not tax cuts, then how should we stimulate the economy? Public investment and direct government spending works better than tax rebates for stimulating the economy. Stimulus spending already in the pipeline will generate jobs and prevent unemployment from reaching the 12% level that it might have reached without the stimulus.

The high unemployment we now have is not the consequence of any failure of the stimulus plan (the spending is just starting and will be increasing this year and next), but rather the result of the economic deterioration that started in the Spring of 2007 and has been far more damaging than economists expected. We are in such a deep hole that even a large stimulus plan will not prevent us from reaching unemployment levels that are unacceptable.

See related work on Recession/stimulus | Economic Growth

See more work by Lawrence Mishel