A favorite Republican talking point lately is that the businesses are not creating jobs because they are “hamstrung by uncertainty.” According to this argument, the specter of taxes and regulation is paralyzing companies, and if only Congress would preserve the Bush tax cuts for the wealthy and promise to not produce any new regulations, a flood of business investment would ensue.
Last night on CNBC, Rep. Mike Pence (R-IN) told supply-side guru and Reagan disciple Larry Kudlow that the way to get businesses to “unleash” the nearly $2 trillion in cash and assets they’re currently sitting on is to extend the Bush tax cuts for the rich and then cut marginal income tax rates even further. “C’mon, we know what works,” Pence said:
C’mon, we know what works. Larry, you know what works better than most Americans, and that is across-the-board marginal tax relief…We’ve got to demand, whether it’s this fall, whether it’s after the election, or whether it’s in a newly minted Congress next year, we’ve got to demand that we preserve tax relief, no American sees a tax increase on January 1, and then promote across-the-board tax relief on marginal rates that’ll really unleash all that more than $2 trillion in trapped capital in this economy.
It seems like some variation of “c’mon!” has become the Republican leadership’s go-to argument these days, but Pence shouldn’t be so smug when it comes to the efficacy of marginal income tax cuts to spur business investment. As Michael Ettlinger and John Irons found, business investment following the Clinton-era tax increase far outstripped that following either the Bush or Reagan supply-side tax cuts:
One of the basic premises of supply-side theory is that tax cuts will produce substantial increases in business investment. This, however, has not been the case…In the two supply-side eras the average growth rate in real investment was unimpressive: It was 2.8 percent in the seven-year period beginning in 1981 and 2.7 percent in the period beginning in 2001. In the period with higher taxes beginning in 1993, the growth rate was 10.2 percent. In the parallel portions of the business cycles following the tax changes of 1981, 1993, and 2001, investment grew faster under the 1993 tax regime than under either supply-side regime. The average rate of growth was 10.5 percent post-1993, 1.4 percent post-1981, and 6.1 percent post-2001.
“The failure of investment to respond to supply-side tax cuts greatly undermines the central premise of the theory underlying the policy,” Ettlinger and Irons wrote.
What is actually holding businesses back, as Paul Krugman wrote, is that there is not enough demand for their products, due to high unemployment and hour and wage cuts. “After all, why should businesses expand their production capacity when they’re not selling enough to use the capacity they already have?” Krugman wrote.
Pence, of course, doesn’t have the strongest grasp on data, so it’s not surprising that he buys the supply-side voodoo. But the situation is, in fact, the opposite of what Pence and Kudlow frame as common knowledge.