Phil Mirzoev's blog

Monday, December 13, 2010

Tax-cuts reduce unemployment: it's an old conservative myth!

Actually general (universally applied) tax-cuts can easily do more harm than good in cases where they put an additional break on the redistribution of capital from developed (often big and powerful) businesses to the developing ones. But this myth is still actively sold by politicians especially conservative ones, who are traditionally in a cozy sweet relationship with huge financial and oil corporations. Idea is simple: to tell small and medium hard-working bees that they are gonna help them in order to get their votes, and then, when in power, to help even more those quasi-monopolistic dinosaurs, who fight competition by their lobbing power, and have little if any interest in intensive development and creating jobs.
To produce jobs through tax cuts you need to apply them selectively to stimulate creation of new businesses and development those in the making. The tax cuts (or breaks) must redistribute the capital flows in favor of new businesses. That's the idea. But if you cut the tax for big reach giants, incl oil companies, financial corps etc, you just allow accumulating the capital in the hands of existing entities and dry out the liquidity inflow into the new businesses. Big corporations in their turn are more often than not disinterested in increasing jobs - rather on the contrary, they, being in a state of equilibrium, try to get new technology to get rid of extra people.
Only new businesses could create new jobs, and, here the state must help.
So, you need tax more the reach, big and stable companies, and give tax breaks to new fledglings, small and average business.
Just two more points about big corporations:
1. Many people like to refer to the necessity for tax reduction for project developments even for big corporation. There is some sense in this point, but in practice more often than not this argument is used in purely demagogic way: 'Reduce our taxes forever, cos we sometimes somewhere happen to develop some projects' - that's the main undercurrent of all those talks about 'poor rich monsters' lacking enough money for their new projects. There could be one thousand and one way to help with new projects without general tax reduction (for all for everywhere), using highly particularized TAX BREAKS. A corporation first proves that it really has a project to develop and then it proves beyond the reasonable doubt that it really develops this project (its not just on paper) and than it gets back some taxes.
But let us have any illusions: in reality those 'quasi-monopolistic' giants are not inclined to spend very much on new projects in times when profits are very high. The brilliant example is the oil giant Exxon Mobile, which stopped enlargement of its reserves as soon as the oil prices sky rocketed, see:
2. In times when tax regime is soft, big corporations, with their high lobbing power, do manage to pay practically much less than small and medium business which is pretty much helpless in the face of state regulations. The same Exxon Mobile in recent times have practically paid NOTHING at all, and that in the climate of super-duper record prices for oil and super-duper profits from it too:

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