Studies question tax-cut link to new jobs

Columbus Dispatch - February 17, 2013

This article by Jim Siegel of the Columbus Dispatch refers to Policy Matters Ohio research as it investigates the supposed link between tax cuts and job creation. 

Governor Kasich’s concept that “tax cuts lead to jobs” has lead to a proposed total tax cut for small businesses of more than 60 percent. Although Kasich’s goal is to encourage job growth, studies by Policy Matters Ohio and others show that

the correlation between income-tax cuts for small-business owners and more jobs is strained at best. At worst, it just shifts the state’s overall tax burden from the wealthy to the working poor and middle class.

According to the article, about 80 percent of Ohio’s 1 million small business owners have no employees beyond the owner, and a 2011 study by University of Chicago economists found that most – skilled craftsmen, doctors, lawyers, real-estate agents and small shopkeepers – have little desire to grow, starting small and staying small throughout their lifecycle.

Kasich’s income-tax cut “winds up being incredible poorly targeted, because the bulk of the money isn’t going to go to businesses that are going to hire people and grow the economy,” said Zach Schiller, research director for Policy Matters Ohio.

The maximum tax cut a married owner with two children could get is $26,000, according to the article, while most small business owners would get less than $17,000. So even if a small business was looking to grow and take on an additional employee,

“The notion that they’re going to run out and hire a lot of people is mistaken,”   Schiller said. “ They wouldn’t get enough.”

Quoting Douglas Elmendorf, director of the nonpartisan Congressional Budget Office, the article points out that

Increasing the after-tax income of businesses typically does not create much incentive for them to hire more workers in order to produce more, because production depends principally on their ability to sell their products.

As Ohio looks to make up revenue lost through the income tax cut through an increase in sales tax, critics say “that will leave many middle-class and low-income workers paying an overall higher tax rate, while giving high-income earners a significant cut.”

Advocates of the income-tax cut who claim that “income taxes are the worst of all taxes from a standpoint of economic growth” are countered by critics from the Iowa Policy Project who point out that “state and local taxes amount to less than 2 percent of the cost of doing business. “You just don’t have much leverage … even with substantial cuts.””

Ohio tax rate ranks it 25th in the nation, and “of the nine states with no income tax, Ohio’s 6.7 percent December unemployment rate was higher than four and lower than four” – hardly strong evidence that state’s income tax is a major factor in job creation. Furthermore, “House Democrats have argued that the 21 percent state income-tax cut passed in 2005 produced no discernable positive results.”

Studies question tax-cut link to new jobs

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