Sunday, February 21, 2010

Taxes and Job Creation

Can the government create jobs? Absolutely. But it's important to examine how these jobs are created in order to understand the economic impact of government job creation.

Creating a job requires money, for the worker must be paid. Government dollars come either from taxation, printing money, or borrowing money. As printing and borrowing are unsustainable options, it's apparent that government job creation requires higher taxation. Ironically, raising taxes is the surest way to stifle overall job creation and hurt the economy.

To see this, consider that the overall number of jobs created is the amount created by government plus the amount created in the private sector. Jobs created by the government are made possible only by taxing the private sector, which results in fewer jobs created in the private sector. For example, say that the government uses $1 million in taxes to create 10 jobs. What if that $1 million hadn't have been taken away from the people? Those 10 jobs wouldn't exist, but the public would have had $1 million more to spend on desired goods and services. The companies providing those goods and services would have made more money, allowing them to hire more workers to handle the increase in business. So the $1 million in taxes created 10 jobs, but prevented an untold number of jobs from coming into existence.

Two other factors further demonstrate why raising taxes to create jobs is counterproductive. First, taxes discourage people from starting their own businesses. People already face the daunting fact that two-thirds of small businesses fail within five years; higher taxes let them keep less of what they earn, lowering the likelihood of expansion and their incentive to try in the first place. Second, bureaucracy means inefficiency. To create jobs, government workers are paid to collect and redistribute the taxes and to organize and oversee the jobs. Money intended for job creation must first pay for more government! This problem is bypassed by letting the free market create jobs where they are needed.

Government job creation is made possible by raising taxes, which ultimately suppresses overall job creation. Today, administration officials boast of the jobs that they've created, even as the overall job market plummets. With more government intervention on the horizon, let's hold our leaders accountable for the prosperity their policies are preventing.


  1. Your argument seems to imply that the optimal tax rate would be 0%, since any tax dollars would be put to better use in the hands of the people/private sector.

    However, I think there is an inherent trade-off. It's not just the number of jobs, but the productivity of those jobs. Are we merely creating one job to dig a ditch and another job to fill that ditch. (Some may say that's what mostly TARP a certain extent I agree). Then this is just a waste of everyone's time and money.

    But, I think there are some things where the dollars are put to better use in the hands of government and not the private sector. For example, the private sector can only run efficiently if the government is there to establish rule of law, respect for property rights and contracts, stable currency, infrastructure, etc. All this requires money! So I think a statement like "raising taxes is the surest way to stifle overall job creation" seems to imply taxes should be zero, when clearly there are some places where the government is needed.

    More importantly I feel, it's not just the tax rate that is the issue, but also where those tax dollars are being used. Even if you lower the taxes, we still have to be vigilant and make sure the money is being put to productive use and not to silly pet projects in a senator's home state!

  2. I agree. With this post, I had in mind the current wave of government job creation, considering that those essential systems of law, sound currency, infrastructure and the like are already being addressed through taxation. So I didn't mean to suggest that 0% taxation is may have been clearer to say “Given that taxes already fund these essential systems, raising taxes is the surest way to stifle overall job creation.”

    And that brings up the other aspect that you mention. There's a tradeoff: government functions require taxation, which hurts the job market, but some functions are essential for a flourishing job market. So we have to wisely determine the set of essential functions that really require government oversight. For example, we shouldn't assume that quality roads/highways can only exist with government oversight, because *if* that assumption is wrong (and private industry itself would fund quality roads to ensure their existence, and potentially higher-quality roads because of their vested interest), then we place unnecessary tax burden on the private sector.

    As to how we determine which set of essential functions require government oversight, we shouldn’t reinvent the wheel. Instead, we should use the insights of those who devoted their lives to deliberating the proper role of government - our Founding Fathers.