Everyone Loves Tax Cuts

It’s a popular saying for many: "Tax cuts don’t create jobs." Google it, and there are more than 100,000 results for that specific claim.

At this point, it is a truism for liberal politicians and commentators that tax cuts are ineffective.

In 2010, Gov. Rick Snyder ran a campaign around getting rid of the hated Michigan Business Tax, which was one of the first things accomplished by the new Legislature. The change overwhelmingly helped small businesses while shifting larger corporations to a much less complicated 6 percent flat tax. The result was a $1.7 billion business tax cut.

Here are some of the responses in the years since:

• "Republicans have consistently cut taxes for big corporations and made middle class families pick up the tab," House Minority Leader Tim Greimel, D-Auburn Hills, was quoted as saying in a Detroit Free Press article.
• "They've shifted an incredible tax burden from businesses to individuals and he did it promising there'd be jobs and he can't point to a single job," Robert McCann, spokesman for Senate Minority Leader Gretchen Whitmer, D-East Lansing, told the Lansing State Journal.
• "My suspicion is that the tax cuts went into pockets, rather than into jobs," Sen. Glenn Anderson, D-Westland, was quoted as saying in a Lansing State Journal story.
• "There hasn't been a wave of new job creation as a result of the new 6 percent corporate income tax, which amounted to a $1.7-billion tax cut for businesses," reported a Detroit Free Press editorial.

Ignoring the debate over how much those specific tax changes helped the economy, the focus of this column is on one simple truth: Despite the rhetoric, people from all sides of the political aisle dole out tax breaks because they know businesses respond with jobs.

When businesses and individuals have capital, they spend it in areas that require workers. The two main ways policymakers can ensure these groups receive extra cash is through a tax cut, which allows them to keep more of their own money, or a subsidy from the state, where the government takes money via taxes and redistributes it.

So if left-leaning groups and liberal Democrats do not believe tax cuts create jobs, why do they overwhelmingly approve of corporate welfare programs? A lot of Republicans approve of selective subsidies as well, but at least they tend to believe — and say — that lower taxes on businesses are good.

For example, the Michigan Economic Development Corp. gives selective tax abatements and direct subsidies to businesses in the state. The largest program of the MEDC is the 21^st Century Jobs Fund, which passed 92-13 in the House and 35-3 in the Senate, with every Democrat voting in support. Michigan's corporate welfare arm also administers the state's film subsidy. The original bill creating the program passed a combined 145-1, with the only "no" vote coming from a Republican senator who no longer is in office.

At the national level, Democrats voted overwhelmingly for the federal "stimulus" program, which was sold as giving selective tax abatements to individuals and companies. And there is a fierce debate in this country over specific tax breaks and outright subsidies for "green" energy companies. For example, electric car battery maker A123 Systems brought President Obama, Sen. Carl Levin, D-Detroit, Sen. Debbie Stabenow, D-Lansing, and former Gov. Granholm together at the company's plant in Livonia in 2010.

Left-leaning advocacy groups in Michigan also support these corporatist programs. Progress Michigan praised stimulus spending on A123, Johnson Controls, Compact Power and Dow Kokam in 2010 (before most of these companies went bankrupt). And Michigan Liberal loved the MEDC — at least when it was administered by a Democratic governor.

So if lower taxes and more money for businesses to spend doesn’t create jobs, how can the left support these tax breaks and subsidies?

Because the crux of this debate is not over whether an infusion of money creates jobs — it's over centralized planning.

The difference between the left (and far too many who call themselves conservatives) and those who favor the free-market is that one side believes that tax breaks and subsidies create jobs when the government gives them to favored companies while the other side believes it is more efficient to have a level playing field, with lower overall tax rates for everyone.

My colleague Michael LaFaive refers to these selective subsidies as "feeding the sparrows through the horse::

Imagine that a central planner wanted to help sparrows grow and prosper. The central planner can dump feed on the ground evenly and let sparrows partake of it directly, or he can run the feed through a horse first, and let the sparrows pick through the pile that the horse leaves behind. The horse in our example represents the government bureaucracy created to maintain economic development programs. The bottom line is that it costs money to pay bureaucrats to take your money and redistribute it to someone else. Spending millions to support these programs just deprives entrepreneurs of the resources they could be using to create more jobs on their own accord.

Many on the left demonstrate an understanding of how business investment creates jobs. But they should explain why reallocating capital through bureaucrats and politicians for the purpose of creating jobs is superior to allowing all businesses to keep more of their own money and produce the same effect.