Nova workboard

a blog from young economists at Nova SBE

The Myth of “Job Creators”

Imagine a world where machines produce jobs for available workers.  Suppose that every unemployed worker could easily find work without cost. Would you stop this machine? Of course not! This tale is the “Job Creators Trap”, however, instead of a machine, we have kind and altruistic capitalists who need our favour and protection. In the 2012 American elections, politician and liberal economists started to use the concept of “Job Creators” as a rhetorical production to name the rich.

But are these men really Job Creators? I don’t think so. In this text, I want to support the idea that the only way the very wealthy will become job creators is by increasing their tax burden.

First of all, we know that equilibrium results from an interaction between supply and demand. It is consensual that firms generally don’t hire because they are benevolent or care about the social welfare, they hire simply because they need to increase their production when they’re facing positive demand shock. Therefore we can conclude that to create jobs we need to stimulate demand, otherwise the capitalists will save all the extra-earnings.

Is it credible to believe that by reducing taxation on income of the wealthiest we are stimulating consumption or even productive investment? Of course, a rich person hires few extra workers to satisfy their high-profile consumption such as a nanny, a motorist or a garden. It is also true that the same rich person has a higher consumption level and may invest more in the real economy than a low-income individual. Yet compared with a middle-income person, the rich have a lower marginal propensity to consume and bigger shares of their saving are invested in financial products with speculation purposes, which have no effect on real economy.

Indeed what I want to demonstrate is that one extra euro in the hand of a middle class consumer has a higher effect on job creation than the same euro in the hand of a billionaire. Consequently, redistribution is a Job Creation mechanism.

Empirically, using Krugman’s example of the US tax system, the top income tax rate in America is about 35%. The paper on optimal taxation by Peter Diamond and Emmanuel Saez suggests doubling this value. It’s not known yet by me if 70% is the optimal tax rate for top income in America, however, what I believe is that increasing taxes on top earners won’t destroy jobs.

Before Regan’s Administration, the top marginal tax rate was always above 70% but during his two terms his administration implemented a tax reform, which dropped the top marginal tax rate to less than 30%. This reform was justified by a stimulus on the supply side of the market assuming that it would lead to a higher efficiency on the capital usage. How has the unemployment rate been affected since then?

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Although the large decrease in top marginal tax rate, the average unemployment rate has increased after Regan’s tax reform. On the other hand, the “top 1%” of earners observed their fortunes growing 4 times in just thirty years, drastically worsening inequalities in income distribution in America.

In conclusion, decreasing taxes on the very wealthy has shown to promote inequalities and did not create jobs, whereby, in my point of view, strengthening the middle class consumers would be a better policy.

Captura de ecrã 2013-04-19, às 16.40.17

By Dino Alves

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Author: studentnovasbe

Master student in Nova Sbe

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