Thursday, July 21, 2011

What taxes encourage job creation?

I try to stay pretty up to date on economic issues but I don't recall that I ever have seen this question posed - or indeed any suggestion that anything other than tax cuts of any kind can stimulate job growth.

This seems fundamentally wrong to me.  It assumes people are always willing to invest in building businesses that create jobs anytime they get a little lower taxes despite the state of the economy.  I think the opposite is probably true in the present economy.  Lower taxes make it easier for people who have money to take no risks, to park their money in a safe place to make sure they don't lose it.  (Anybody out there know of any studies looking at this subject?)

Right now politicians are beating each other up about "job creation" but I am hearing no solutions that will hurdle the basic problem the US economy is more unstable than it has been in generations.

Where would you park your money if you had a bunch of it you wanted to protect?  Right now when taxes on corporate dividends are low dividends from safe secure established companies provide a safe haven for capital that might otherwise be expanding businesses, or starting new businesses.  That seems the likely explanation for the fact the stock market seems disconnected from the economy.  Despite a continuing stream of gloomy reports on the housing market and the job market the stock market is up 30% over the last year.

Part of the reason is also probably the relatively low levels of taxation on short term Capital Gain.  It allows people to play in the security or commodity markets rather than tie money up in a long term business venture.  Seems like the haven for minimizing taxes ought to be long term Capital Gain, where building a business is rewarded.

It seems to me we ought to be increasing the tax rate on dividends and short term capital gain, and coupling that stick with a carrot - generous job creation credits to be applied against income taxes.

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