July 7, 2005
Do Tax Cuts for the Wealthy Stimulate Employment?
By ROBERT H. FRANK
THE centerpiece of the Bush administration's economic policy has been large federal
income tax cuts aimed mainly at top earners. These tax cuts account for much of the $2
trillion increase in the national debt projected to occur during the Bush presidency. They
prompted a large group of Nobel laureates in economics to issue a statement last year
condemning the administration's "reckless and extreme course that endangers the long-
term economic health of our nation."
The question of whether to make the tax cuts permanent is still on the Congressional
agenda. So it is an opportune moment to examine the president's argument in support of
Mr. Bush never pretended that the tax cuts were needed to make life more comfortable
for the well to do. After all, with the bulk of all pretax income gains having gone to top
earners in recent years, this group has prospered as never before.
Rather, the president portrayed his tax cuts as the linchpin of his economic stimulus
package. He argued that because most new jobs are created by small businesses, tax cuts
to the owners of those businesses would stimulate robust employment growth. His policy
thus rests implicitly on the premise that if business owners could afford to hire additional
workers, they would. But whether owners can afford to hire is not the issue. What matters
is whether hiring will increase their profits.
The basic hiring criterion, found in every introductory textbook (including those written
by the president's own economic advisers), is straightforward: If the output of additional
workers can be sold for at least enough to cover their salaries, they should be hired;
otherwise not. If this criterion is met, hiring extra workers makes economic sense, no
matter how poor a business owner might be. Conversely, if the criterion is not satisfied,
hiring makes no economic sense, even for billionaire owners. The after-tax personal