Killing Jobs with Tax Increases

areyounext Killing Jobs with Tax Increases
The looming campaign to approve or reject two new legislative tax increases will be spirited and probably heated. Tax proponents will claim that only very high-income individuals (under Measure 66) and corporations (under Measure 67) will bear virtually the entire burden. Opponents will respond that those being taxed are the job creators, and taxing them will cost many ordinary Oregonians their employment.

Most economists understand that it’s actually individuals who pay business taxes. Individual consumers pay business taxes in the form of higher prices. Employees pay business taxes in the form of lower compensation and fewer job opportunities. Owners and shareholders pay business taxes in the form of lower take-home pay, dividends and stock prices. Because the cost of higher business taxes is spread among consumers, employees and investors, it is difficult to quantify how any specific individual would be affected by the higher tax.

Economists are debating whether the U.S. is still in a recession or entering a jobless recovery. Regardless, raising prices to consumers may be virtually impossible. At the same time, layoffs are still looming and businesses are slow to hire additional workers. What voters believe these new taxes will do to jobs very well could be the deciding factor in the January 26, 2010 special election, where both measures will be decided.

Tax proponents have latched onto a recent Legislative Revenue Office (LRO) report which they claim argues that raising personal and business income taxes now will be good for Oregon’s economy. But the report actually says that the tax increases will reduce employment and personal income over the next seven years. After seven years, the report assumes that if the new money results in what it calls “productive state spending,” then employment and personal income will grow.

It is almost certain, however, that the additional taxes would not go to productive purposes. Instead, the looming Public Employee Retirement System (PERS) crisis makes it likely that most of the new tax revenue will be eaten up in higher state contributions to PERS, needed to maintain public employee retirement benefits. You simply can’t increase productivity if you spend the money on benefits for workers who long since left the job.

Irrespective of the PERS funding situation, the LRO report conclusion is refuted by dozens of academic studies which find that increasing personal and business income taxes actually lower employment and economic output.

Cascade Policy Institute asked two respected Oregon economists to look at the specific tax measures under discussion here and to estimate their impacts on job creation in the state.

William Conerly, Ph.D. looked at Measure 66 (the personal income tax increase) and concluded that it will cost the state over 30,000 jobs. He based this estimate on a model of state employment growth that incorporates data for all 50 states for 26 years. It exploits tremendous variation in tax practices from one state to another, and within individual states across time.

Randall Pozdena, Ph.D. looked at the business income tax increase portion of Measure 67 and found that it will cost the state over 40,000 jobs.[v] He derived this estimate from studies based on country comparisons and notes that tax competition among states is likely higher than that among countries, resulting in greater movement of jobs to states which tax corporate incomes at lower rates.

So, combined, these two tax measures will cost over 70,000 Oregonians their jobs. That’s 70,000 people who have jobs today but will lose them if these taxes go into effect, or 70,000 people looking for work who won’t find it. Either way, that’s a far cry from tax proponents’ claims that only a small slice of Oregonians will feel the burden of these new taxes.

Dr. Pozdena notes that the projected job losses associated with the net income tax rate increases in Measure 67 do not take into account the other major provision of the bill, namely the increase in the corporate minimum tax from the current $10 a year to between $150 and $100,000, depending on gross Oregon sales. He states: “This provision is clearly damaging to the economy and hard to quantify without detailed tax return data. Ominously, because it taxes gross income rather than net income, the tax easily may exceed a company’s net income and can be tantamount to a net income tax of more than 100 percent.”

In conclusion, Oregonians need to recognize that capital and people are mobile, especially the corporations and high-income individuals targeted by these two tax measures. If they move, Oregon loses the jobs that their companies, spending and investments create. Even for those that remain, these higher tax rates will reduce the motivation to work harder and create more jobs.


Steve Buckstein is founder and senior policy analyst at Cascade Policy Institute, Oregon’s free market public policy research center.

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Posted by at 05:50 | Posted in Measure 37 | 29 Comments |Email This Post Email This Post |Print This Post Print This Post
  • Jerry

    The proof that Steve is right are Oregon’s current high taxes and second in the nation unemployment.
    What a great state government we have. So many new jobs. So much prosperity.
    Isn’t it wonderful?

    • Anonymous

      You’re so right! If only Steve Buckstein would run for Governor. We be guaranteed prosperity!!

      • Jerry

        Anyone could do a better job than Ted “Malaise” Kulongoski

        • Anonymous

          touché

          LOL

          • anonymous2

            In all seriousness, compared to the current crop of announced Gov. candidates, No, Evil Billy, Dim Lim, Blind Alley, and Steve looks pretty damned good! I mean really.

        • eagle eye

          I guess that’s why there’s such a strong lineup on the Republican side to succeed Ted!

  • Anonymous

    Prooving that progressiveness is a mental disorder is the Oregon left wing embrassing John Kitzhaber’s new run for Governor.

    • eagle eye

      Maybe so, but do you see anyone from the other side who has a prayer of beating him?

  • Anonymous

    No I don’t.

    That hardly excuses the Progressive’s insanity gripping this State.

    It demonstrates the strength of the grip. The massive public employee union regime and their deep pockets have driven Oregon to the brink and ALL of the lefties like Steve Novick et al demand more of the same across the board.

    More taxes, overturn M5, create a sales tax, end the kicker, expand goverment programs, increase all education spending to increase compensation packages, adopt cap and trade carbon taxes, exapnd goverment entitlement and dependency and never question or scrutinize any of the widespread goverment dysfunction and misappropriation.

    ==== Insanity

    • eagle eye

      By and large the public doesn’t support the agenda of the Novicks etc. There’s a real good chance one or both of the tax increases will get voted down in January, and largely for the reasons Buckstein presents.

      But at the same time, there are probably reasons why they find the Republican opposition so repugnant, so much so that they consistently decline to vote them in, even when it means voting in Kitzhaber, Ted K, and the like.

      You can blame the unions all you want, but I don’t buy it, not for the most part. If there was an attractive opposition, even an opposition that didn’t repel the majority — think back to Vic Atiyeh, think Gordon Smith — the Republicans would still be competitive in Oregon.

  • Rupert in Springfield

    You have to wonder a little bit. Does the average person ever make a connection between raising taxes and killing jobs? I have a feeling that the two seem entirely unrelated in most peoples mind. The success of raising taxes depends little on objective thought and mostly upon playing up the greed within people and then pitting one group against another in order to fulfill that greed.

    It’s an old game and given the number of uninformed who apparently believe that by incorporating ones tax bill goes from thousands to $10 I have little faith there is the brainpower in that group to make any connection to jobs. These are, after all, the same people who could not figure out that if their $10 theory were true, then it would tend to raise questions of intelligence if they were not incorporated themselves.

    With the current round of attempts to tax ourselves into prosperity we have now crossed the threshold of idiocy. When you declare that it is proper to raise taxes on business that has suffered a loss, then you have declared a war on productivity worthy of an Ayn Rand novel.

    I would suggest as an additional measure raising taxes on those below the poverty level. If you are comfortable raising taxes on the mom and pop store that suffered a loss for the year, you certainly would be comfortable raising taxes on a family in poverty since if they had any income at all they made more than mom and pop did with their store.

    Maybe at some point Oregonians will learn that taxing themselves into prosperity is a fools errand. Frankly given that Kitzhaber can step up, propose raising more taxes and not be laughed out of the contest makes me think we aren’t there yet.

    • Anonymous

      duh…. debt…. dahh… print currency…. ummm…. taxation…. der… rising production costs…. uhhh…. demand pull…. errr…. inflation…. ugh…. lower unemployment…. mmm… john galbraith.

      think is hard cant do more

  • David Appell

    Clinton increased taxes during his reign, and yet that period also saw some of the most impressive gains in employment in recent decades. How do you explain that?

    • Rupert in Springfield

      Well, there were other things going on that could have affected employment besides the Clinton tax increase. At the time, Clinton didn’t even try and sell increasing taxes as the road to higher employment so its interesting you make that connection now. So what happened?

      The realization of the internet created the Dot com bubble
      Relatively low interest before 1993 and rising but still low rates after created the Housing bubble
      Clinton signed NAFTA
      Clinton signed welfare reform.

      All those things are far more likely to have increase employment, and in fact the last two cases were claimed to do just that.

      Clinton increased taxes to supposedly to get the deficit under control and raise the growth rate by the lower interest rates that would come from a lower deficit. However shortly after the tax increase the administration lowered its economic assumptions and interest rates rose even though they had been trending downward for the previous 18 months. In that regard an upward trend in he business cycle was already well underway prior to the tax increase. By 1994 the Clinton tax increases had been in effect for over two years and there was no end in sight to the deficit problem. Clinton sent a budget to the newly Republican congress in 1994 that included $300B or more deficits for as far as the eye could see.

      So what happened? Well, deficits did come down, but not a lot of that was due to the tax increase. Recent prior deficits had been bloated due to the Savings and Loan scandal combined with the 1990-91 recession. The Clinton tax increase was sold entirely on the basis of bringing down the deficit and thus bringing down interest rates. Since rates trended upward after the tax increase, while they had been trending downward prior to it, one would be hard pressed to make the argument that the tax increase lead to economic good times since its stated premise failed to materialize at the time. To go back and then change the original premise of the tax increase so as to suit historic conditions that followed would be a disingenuous assessment of what happened.

      • David Appell

        Rupert wrote:
        > Clinton increased taxes to supposedly to get the deficit under control

        In fact, Clinton DID get the deficit under control. He left a balanced budget to GW Bush, who, of course, immediately proceeded to ruin that and spend willy-nilly.

      • David Appell

        Rupert wrote:
        > So what happened? Well, deficits did come down, but not a lot of that
        > was due to the tax increase

        Of course, you idiot. That’s the whole point. Govt should pay for its expenditures, by raising taxes if necessary.

        Let’s note how sound the economy was when Clinton handed it off to Bush, and how lousy it was when Bush handed it off to Obama.

      • Roadrunner

        Also, when Reagan signed the tax cut bill in August, 1981, unemployment started going up, going from 7.2% in July, 1981 to 10.8% in November, 1982.

        So much for tax cuts “creating” jobs.

        http://data.bls.gov/PDQ/servlet/SurveyOutputServlet

    • Steve Buckstein

      No one is saying that raising taxes will lead to absolute job losses no matter what. Other factors are always involved. It’s sort of like saying that a rise in CO2 levels in the atmosphere will absolutely lead to “climate change.” The world is too complicated for such simple answers.

      That said, what our economic analysis says is that M66 an M67 tax increase will mean that over time there will be 70,000 fewer jobs than there would have been without them. Other factors could result in more or fewer overall jobs over the years, but even if there are more jobs, there will be 70,000 fewer than there would have been without the tax increases.

      The same holds true for the Clinton years. In hindsight, here’s what the Joint Economic Committee of the Congress said in 1995 when comparing the Bush(1)/Clinton tax policies to those of Reagan before them:

      “With four years of data on the current economic recovery (extending back to the Bush Administration), it is now possible to tally up the scorecard and compare the Bush/Clinton recovery that started in 1991 with the Reagan recovery that began in 1982. President Clinton has boasted that his policies have spurred economic growth, added jobs, and helped the middle class. However, the data show that the Bush/Clinton recovery is weak compared to the Reagan recovery along several important measures. Both economic growth and job creation in the current recovery lag behind the Reagan recovery by two full years. The middle class is suffering an actual loss in real median family income, while during the Reagan recovery it gained. Moreover, tax revenues increased more rapidly under Reagan’s tax cuts than under the Bush/Clinton tax increases.

      “The most outstanding policy differences between the two recoveries are in the realm of tax policy. Reagan instituted across-the-board reductions in tax rates, while Bush and Clinton both pushed massive tax increases. The most disturbing conclusion is that the 1990 and 1993 tax increases have cost Americans far more than the extra earnings collected by the IRS; they have cost the economy at least two years of growth.”

      Source: http://www.house.gov/jec/growth/taxpol/taxpol.htm

      • v person

        “It’s sort of like saying that a rise in CO2 levels in the atmosphere will absolutely lead to “climate change.”

        No Steve, its not a good comparison because the relationship between atmospheric CO2 and climate change is physical science, while taxes and economics are social sciences. The former is more predictable then the latter.

        70,000 jobs “over time” in Oregon is a meaningless number simply because so much depends on population growth. Under average economic conditions Oregon is an attractor of people. To the extent we create more industry and jobs we attract more people to fill those, so our unemployment rate and per capita wealth are not really affected. We will always track a bit higher than the national average on unemployment as long as our quality of life (second paycheck) is high enough to pull people our way.

        Was that Joint economic Committee of Congress in 1995 in any way biased to Reagan and against Clinton? I mean, which party controlled Congress at that time? Plus, much of the economic growth and the balanced budgets under Clinton occurred after 1995, so how could they compare a 2 year record against an 8 year one? Silliness for you to even cite that here.

        • Steve Buckstein

          My point using the CO2 comparison was to say that there are other factors involved and atmospheric scientists haven’t been able to predict future temperatures based on CO2 levels.

          And, even if Oregon’s population grows substantially, 70,000 fewer jobs is far from meaningless if you’re one of the 70,000.

      • Roadrunner

        Mr. Buckstein,

        How do you explain the fact that unemployment increased dramatically after Ronald Reagan signed the tax cut bill in August, 1981? If tax cuts create jobs, it seems as though in the short term they can have the opposite affect.

        Furthermore, George W. Bush signed tax cut legislation in June, 2001, when unemployment was at 4.5%. A year later it was 5.8%, and two years later 6.3%. It didn’t fall to the June, 2001 level until September, 2006.

        http://data.bls.gov/PDQ/servlet/SurveyOutputServlet

        • Steve Buckstein

          As I tried to explain, tax rate changes alone do not determine employment rates. What we’re dealing with here are two tax increases that, everything else being equal, will lead to 70,000 fewer jobs in the state than if these taxes had not increased. That doesn’t mean that employment rates can’t go up even after tax rate increases if other factors change. But for Oregonians, the factor that is under our control is whether or not these two taxes will be increased. Our research says that if Oregonians vote to increase these taxes that there will be 70,000 fewer jobs than if they don’t.

          • Roadrunner

            Mr. Buckstein,

            On a national level, at least, it appears that if tax rates have any affect on unemployment rates, it’s that they’re are either so small that they don’t have any counter to other factors, or that tax cuts for the rich actually cause unemployment to go up, and tax increases to cause unemployment rates to go down.

            Your argument is that tax increases cause unemployment to go up, but there really seems to be little evidence of that. On top of that, Oregon already has some of the lowest business taxes in the country, yet we have a high unemployment rate. Perhaps the national experience is also true from state to state.

      • v person

        But that is my point Steve. No one is one of those 70,000 missing jobs, because the presumption has to be that if they are not created in Oregon due to tax policy then they are created in another state that has a more favorable tax policy, and anyone who wants one of those jobs badly enough can migrate there instead of here.

        If our population were static and migration prevented, then the missing 70,000 jobs would be important. Otherwise it means nothing. For every one of those jobs we create we will also create at least 1 new in migrant, legal or otherwise.

        And on climate, scientists have modeled a projected change in temperature based on alternative levels of CO2, adjusting for other known factors. They have calibrated these models by running them backward against the change in CO2 levels over the past 100 or so years. Economics is a lot less predictable. Too many variables, which is why so many of them missed predicting the collapse of the housing bubble and its consequences to date. Economists can model trends, but cannot “predict” precise numbers like your 70,000 lost jobs.

        • Steve Buckstein

          “No one is one of those 70,000 missing jobs, because the presumption has to be that if they are not created in Oregon due to tax policy then they are created in another state that has a more favorable tax policy, and anyone who wants one of those jobs badly enough can migrate there instead of here.”

          I don’t share your premise. Jobs lost here aren’t automatically created somewhere else. This is not a zero sum game. Even if it was, I don’t think it would be much comfort to 70,000 Oregonians without jobs to be told “move somewhere else where voters didn’t raise taxes.”

          I’ll leave the climate change debate to others. I just made the original comparison with CO2 because of who made the initial challenge here (David Appell).

          • v person

            Last point from me, but 70,000 Oregonians would not have to move elsewhere. Since these are mythical future jobs, it would be 70,000 people from elsewhere choosing to not move to Oregon because we would not have adequate employment for them. There is a huge difference between the 2.

            Now if you were talking 70,000 replacement jobs in Oregon for those that will be lost due to inevitable economic changes, different story. But I don’t think that is what you are talking about.

          • Steve Buckstein

            These are interesting scenarios, but I don’t think we can know exactly which might come to pass. The economy is complex, and people change their behavior in ways that are often hard to predict.

            I’ll just say that based on all the so-called young creatives flocking to Portland that I wouldn’t be so sure that people wouldn’t come here even if jobs don’t exist.

  • Roadrunner

    Steve,

    Given your premise that increased taxes lead to lost jobs and tax cuts lead to job creation, please explain to me why it is that after the Reagan and GW Bush tax cuts unemployment jumped markedly, while unemployment dropped steadily after the Clinton tax increase?

    If job creation is the goal, there clearly must be other factors that are far more powerful than tax cuts. Why aren’t you investigating what those other factors might be, and pushing for those, rather than pushing for policies that clearly have, at best, a negligible effect? Based on the evidence, it appears that tax cuts are actually counterproductive in creating jobs.

    • Steve Buckstein

      Remember that this discussion is in the context of the upcoming vote on M66 and M67. Raising or not raising the personal and corporate taxes in this state are all that is on the table for Oregonians to vote on in January. I agree that there are other factors, and stated above that they may even outweigh tax changes, but right now our choice is to let taxes rise with a resultant loss of jobs, or see them not rise and find other ways to deal with what is a problematic state budget hole.

      We’ve suggested many ideas in the past, and will suggest ways in the future to improve the economy of this state, but the short term game has been dictated by a 3/5 majority of the legislature, so we are responding to the choices we have at the moment.

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