CAP en Español
Small CAP Banner

Payroll Tax Cuts Are Better Job Creators than the Wealthy

Conservative Dogma Doesn’t Match Reality

SOURCE: AP/Evan Vucci

House Speaker John Boehner of Ohio walks off the floor of the House chamber on December 20, 2011, in Washington. The House rejected bi-partisan legislation passed by the Senate that would have extended a payroll tax cut and jobless benefits for two months.

    PRINT:
  • print icon
  • SHARE:
  • Facebook icon
  • Twitter icon
  • Share on Google+
  • Email icon

Right-wing politicians on Capitol Hill may not think much about letting payroll tax cuts for middle-class families or unemployment-insurance benefits expire next year, but they’ll sure go to the mat to protect America’s superwealthy. Earlier this month all but one Republican senator voted to filibuster legislation that would have continued the payroll tax cuts and unemployment insurance, paid for by a small surtax on anyone with income more than $1 million. So Democrats dropped this provision in a compromise with Republicans that passed the Senate. Even so, all but seven Republicans in the House of Representatives refused even to consider the Senate-passed payroll tax cut extension.

So the wealthy get a Christmas bonus, not having to pay a little extra to extend the payroll tax cut. And come January, paychecks going to the average American family may feel about $120 lighter every month thanks to yesterday’s House vote.

Why do conservatives believe it doesn’t matter if everyday Americans pay more in taxes next year so long as a few wealthy Americans don’t pay a little extra? Sen. Jon Thune (R-SD) said that millionaires shouldn’t be taxed lest they decide not to create the jobs on which the rest of us depend. And House Speaker John Boehner (R-OH) says, “You can’t tax the very people that we expect … to create jobs.”

Are the wealthy really “job creators?” To be clear, everybody would have paid normal taxes on incomes up to $1 million under the bygone Senate plan, but those with an income of $1,000,001 or more would have paid a small surtax on just those incremental dollars. This little extra, conservatives say, would be a real jobs killer. But the idea that job-creating power resides with the wealthy is about as false as the idea that feudal landlords “created” the farmed goods produced by peasant serfs.

Holding people in one’s employ, even by the thousands, is a very different thing than creating jobs in our economy. No one is a job creator by virtue of wealth. Jobs are created when there is a demand for the productive labor of workers and when some creative, enterprising individuals figure out a way to meet that demand. Millionaire entrepreneur and venture capitalist Nick Hanauer gets what career-politician Boehner seems not to understand. “If no one can afford to buy what I have to sell, my business will soon fail and all those jobs will evaporate,” he wrote last month.

Most of that demand comes from a secure middle class, which brings us back to the payroll tax cuts. Continuing with the payroll tax cuts first made under the American Recovery and Reinvestment Act of 2009 would mean an extra $120 billion in the pockets of U.S. families in 2012, another 1 percentage point on our economic growth rate, and as many as 1 million more jobs in the economy, according to private-sector forecasters.

Estimates from the nonpartisan Congressional Budget Office routinely find that payroll tax cuts are strong job-creation policies, ranking behind only unemployment-insurance benefits and middle-class-targeted tax breaks in terms of job creating bang-for-the-buck. All of these policies put cash directly into the pockets of the middle class. And they well outpace any job creation that comes through corporate income tax cuts, or the Bush tax cuts for top income earners that conservatives have been demanding to continue.

It should be obvious: Unless we have sufficient numbers of people able to buy the stuff we are capable of producing in our economy, there’s no reason to hire people to produce it. The wealthy buy a lot of stuff, but there are relatively few of them, and they tend to save much more of their income than do middle-class families. So an extra dollar of income for the middle class—from a payroll tax cut, for example—has a much bigger job-creating impact on demand than does an extra dollar of income for someone who may barely notice it.

In contrast, there’s really no correlation between higher tax rates on the very wealthy and the ability of our economy to create jobs. A perusal of the Forbes 400 list suggests why. While these 400 people are not necessarily representative of all extremely wealthy people, economics research using other data sources indicates that the differences are more in scale than in scope. As a group, the Forbes 400 hold more wealth than the “poorest” 150 million Americans.

Thirty percent of the Forbes 400, people whom conservatives call “job creators,” actually inherited their vast fortunes, and fewer than half of these are still involved in running the corporations from which their wealth originated. Certainly most Americans wouldn’t mind trading bank accounts with one of these lucky people, but how many would claim to have earned or created such a fortune?

Being wealthy is not a bad thing. Among the Forbes 400 are innovative, hard-working people whose creativity and enterprise have created entire new industries in our economy and the jobs that go with them. And among the list are also myriad civic-minded individuals who donate vast sums of their wealth to worthy causes.

But that doesn’t mean that their wealth—and public policies to shelter it from even modest taxation—are essential to job creation. In fact, a recent study from the Kauffman Foundation shows that most of the enterprising, innovative individuals creating new jobs in our economy come from the middle class, not the top end of the wealth and income distribution. Only about 3.3 percent of small businesses are owned by millionaires. Middle-class and lower-income people actually have better incentives to innovate and strive to build job- and wealth-creating businesses because being rich is pretty nice, even if taxes become marginally higher.

Though conservatives have once again managed to shelter the extremely wealthy from contributing more taxes, the payroll tax cut that would benefit the economy’s real engines of job creation remains in limbo due to their intransigence and misguided economic theory.

Adam Hersh is an Economist at the Center for American Progress. Sarah Ayres is a Research Associate with the Economic Policy team at the Center.

To speak with our experts on this topic, please contact:

Print: Allison Preiss (economy, education, poverty)
202.478.6331 or apreiss@americanprogress.org

Print: Tom Caiazza (foreign policy, health care, energy and environment, LGBT issues, gun-violence prevention)
202.481.7141 or tcaiazza@americanprogress.org

Print: Chelsea Kiene (women's issues, Legal Progress, Half in Ten Education Fund)
202.478.5328 or ckiene@americanprogress.org

Spanish-language and ethnic media: Tanya Arditi (immigration, race and ethnicity)
202.741.6258 or tarditi@americanprogress.org

TV: Rachel Rosen
202.483.2675 or rrosen@americanprogress.org

Radio: Chelsea Kiene
202.478.5328 or ckiene@americanprogress.org