Tax Cuts for the Wealthy and Job Creation

The other day the SPD announced its Election Platform, which included a plan to "soak the rich" by increasing the marginal income tax rate for individuals earning in excess of € 250,000.  The CSU/CDU was quick to condemn the plan as hurting the potential for job growth.  Edmund Stoiber led the attack:

"Schröder und (SPD-Chef Franz) Müntefering haben in der ernstesten Arbeitsmarkt-, Wachstums- und Schuldenkrise Deutschlands seit 1949 neue milliardenschwere Wahlgeschenke auf den Tisch gelegt anstatt Antworten auf die notwendigen Veränderungen in Deutschland zu geben", sagte Stoiber in München.

On the contrary, the CDU contends, the path to creating new jobs is through cutting taxes for the wealthy: the CDU is expected to announce a plan to cut income tax rates across the board to 39% (while increasing the value-added tax – Mehrwertsteuer).

But does cutting taxes for the wealthy actually lead to higher employment?  The signature policy of the Bush administration and the Republican Congress has been put through huge tax cuts that benefit primarily the top 2% of Americans in terms of income.  The result, according to Cornell economist Robert Frank, show that cutting taxes for the wealthy does not create new jobs:

A second way the Bush tax cuts might have stimulated employment is by inducing the wealthy to spend more on consumption. But a large share of the tax windfalls received by the wealthy are not spent in the short run. And even among those who are induced to spend more, the main effect is not increased demand for domestically produced goods and services, but rather increased bidding for choice oceanfront property and longer waiting lists for the new Porsche Carrera GT. Such spending does little to stimulate domestic employment.

Had the dollars required to finance the president’s tax cuts been used in other ways, they would have made a real difference. Larger tax cuts for middle- and low-income families, for example, would have stimulated immediate new spending because the savings rates for most of these families are low. And their additional spending would have been largely for products made by domestic businesses – which would have led, in turn, to increased employment.

The facts speak for themselves: total private employment – despite the largest tax cut in history – was lower in January 2005 than January 2001 – the first time since the Great Depression that employment fell in a president’s term.  So in terms of job growth, the SPD has a stronger platform going into the election.

UPDATE:  The other day I posted about the problems of viewing the US economy as a model for Europe.  Well, for German readers, there is an excellent piece by Joachim Jahnke on Albrecht Müller’s NachDenkSeiten:  Neoliberales Modell USA?  Jahnke explores in some detail some of the issues I brought up.