It often surprises me to watch presidential candidates debate about how to deal with several problems occurring today in the United States.  I am not an American, and I don’t vote for the U.S. presidency.  However, through social networking in Facebook and Google+, and what I read in the news daily, it seems that Americans are looking for a good candidate for the presidency.

The right-wing is now divided between the more intelligent conservatives and the Tea Party.  I agree with the economist Robert H. Frank when he said that if you use Venn diagrams you will be able to see that the set of issues the Tea Party is angry about and the set of issues the Tea Party is confused about intersect perfectly in one whole circle.  When they describe Obama as being a socialist bordering on Nazism and Marxism, they are not really thinking.  The fact that Nazi means national-socialism does not mean that the sort of socialism that socialists in general are asking for involve concentration camps. Tea Partiers forget how many Marxists and Communists were persecuted by the Nazi regime, and how Hitler expressed his hate for them in Mein Kampf.  Needless to say that not all socialists are Marxists.  There are anarcho-syndicalists or libertarian socialists, which involve socialism comprised of free federation of communities of workes without the existence of a state.  There are also socialist-democrats (and I count myself as one of them) who essentially advocate for a mixed economy where the free market should have its own place, but regulated by the government, while the government would assume the responsibility of certain essential goods.

Yet, Obama is none of these things.  Supposedly, he is a liberal (pro-capitalist, but centrist), although I agree with Bill Maher that he is not even liberal.  This means that Tea Party and other people in the right have absolutely no idea what they are talking about.  If Obama were a socialist a la Soviet Union, he would have socialized all banks and private enterprises at this stage of his command.  He hasn’t.  He has only carried out a bad Keynesian approach, which is different from a Marxist approach.  Marx wanted to abolish capitalism.  Keynes wanted the government to intervene to save capitalism.  Much of what Obama has done has been to temporarily assume the shares of some companies and bail out others which are “too big to fail”.  I don’t think that this was a good approach to companies responsible for the economic downfall, but ever since Bush, this has been the tendency of the federal government (and most industrialized governments thus far).

On the other hand, for many liberals and progressives, Obama’s term has been an abysmal failure.  Progressives elected him because he did talk about change in Washington, D.C., no more business as usual.  He wasted a lot of valuable time trying to be “conciliatory” to an anti-conciliatory right-wing, especially when Congress was dominated by the Democratic Party.  Before the 2008 elections, I knew he would also be a failure in terms of human rights.  Before he was elected president, he voted for FISA.  He promised to end the Iraq war and he did, but after three wasted years spending money on it, increasing the national debt exponentially.  He promised to close Guantanamo …  that never happened.  He promised that his administration would be crystal clear regarding Iraq and government affairs in general, yet, the year 2011 is an all-time record of secrecy and censorship regarding freedom of expression (see the statement made by the Electronic Frontier Foundation).  To make matters worse, still in the midst of a recession (with a timid sort of recovery), as we speak the President is preparing U.S. forces in the Ormuz Straight in an apparent plan to attack Iran. Suppose the U.S. win, will it stay in the same way that the U.S. stayed in Iraq, draining the U.S. economy and needlessly increase its debt? Obama has also been the president who has most enforced anti-immigration laws (more than Bush or any other Republican administration ever has), especially Hispanic illegal immigrants.  And last, but not least, he signed the damnable National Defense Authorization Act of 2012 recently (December 2011) which opens the door to violations of human rights against American citizens.  In almost all accounts, from a progressive and even liberal standpoints, Obama’s administration has been significantly worse than Bush’s.

Obama:  Hope ... You don't get indefinitely detained

Both the right and the left are looking for new options, and the U.S. is paying close attention to Republican presidential candidates, given that the Democrats are pretty much stuck with Obama.  What completely amazes me among all the candidates is the apparent blindness regarding taxes.  Even Rick Santorum, a candidate I certainly do not respect (politically at least), stated that for job creation, we need to reduce corporate manufacturing rates to zero percent, and I know of other Republican candidates who would perfectly agree with that plan.

This is insanity!

Since when tax-exemption in any industry has been key for job creation?

Let’s Read Adam Smith Again!

Republicans and conservatives in general are supposedly followers of Adam Smith.  I’m a socialist, but I can really, really appreciate Smith’s invisible hand doctrine.  There are some forms of selfishness which benefit the public by creating innovation at low cost.  If selfish people enter in the business world, in an environment of competition, the market will make sure that the public will have the best quality product at the lowest market price possible.  This is perhaps one of the greatest insights in the history of political economy.  Yet Smith himself was a lot wiser than his supposed disciples.  Not always would the market benefit the public.  We should take into account these passages from The Wealth of Nations:

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.  It is impossible, indeed, to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. (p. 111)

To widen the market, and to narrow the competitiion, is always the interest of the dealers.  To widen the market may frequently be agreeable enough to the interest of the public; but to narrow the competition must always be against it, and can only serve to enable dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, as absurd tax upon the rest of their fellow-citizens.  The proposal of any new law or regulation of commerce which comes from this order, ough always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention.  It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it (pp. 213-214).

Yet, for some reason many people on the right, especially those of the Tea Party, readily ignore Smith’s advice.  Smith’s position is not that the government should not participate in the economy …. period.  On the contrary, when things are unequal, and certain people “of the same trade” conspire and oppress the public, the role of government is precisely to set the laws and regulations in order to prevent that from happening.   Smith’s advice that government should not intervene with the economy has more to do with the fact that many people of “the same trade” will seek to go to government so that a certain bill is passed, so that a new law will benefit corporations in detriment of the public.  In such cases, government should just stay out of the way, not legislate such policies, and let the “invisible hand” of the market rule.

However, there are some other aspects about Adam Smith’s doctrine which are usually overlooked by many of his supposed fans when they propose tax exemptions as the way of creating jobs. In the third chapter of The Wealth of Nations, Smith talks extensively about division of labor.  This chapter is very illuminating.

As we all know, Smith held that the wealth of nations is basically the product of three components:

  • Rent of  Land
  • Salary
  • Benefits

Rent of the land involves the sort of payment for facilities that you need for production (although in The Wealth of Nations Smith uses the term “land” in a broad sense, Smith uses examples of agriculture to convey his point).  Salary is the nominal labor price which you pay your workers, while the benefits involve the profit component.  Note that Smith did not dismiss taxes.  Smith recommended that taxes should be established on luxury, as well as on the rent of land, not over benefits. (See an excellent brief summary on his views on taxes here).  Actually, he elaborated extensively (about one third of his work) on how governments should tax.  Certainly he, an ethicist, would have never subscribed to the slogan that “all tax is theft”.  Yet, I want to differ from Smith regardding the idea that profit should not be taxed, and suppose tax on benefits to use Smith’s own theory to get to the point I want to make.

Notice that, though taxes themselves can serve to regulate the economy (e.g. taxes on luxury), nowhere in Smith’s analysis taxes (or lack of them) play any role whatsoever in creating jobs.  That is because in the third chapter of The Wealth of Nations, Smith reveals the most fundamental aspect of job creation ….  the size of the market (pp. 10-11, 21-25). When I explain Adam Smith to my students, I always say: “I wish that there were massive sales of philosophy books all over the world, so that we see the fruits of such industry of thinking and rationality.  Yet, since the market of the Twilight series is much greater (yuck!), I guarantee you that the number of workers producing Twilight products is greater than those producing philosophy books  (grumpy face)”.  Since the Twilight market is a lot greater than the Husserl market, then the number of employees needed for the Twilight market will be a lot greater than the Husserl market.

Of course, taxes should not be so high as to strangle an industry.  Taxes which require a hundred percent of profits would make any industry fail miserably.  Yet, with more moderate taxes, let’s suppose 15% or 30% or so, an industry might persist (depending on the circumstances).  Yet, once a right tax rate has been required by the state and the federal government, then the question is whether reducing it will create jobs.  The answer is no, for reasons given by Smith himself in that third chapter.  I will use a more “down to earth” analogy.

Let’s say that I want to create a business selling toasters in Puerto Rico.  I do a market analysis and I find that in order to satisfy the effective demand (the number of people who want my products and can pay for them), I will need to hire 500 workers.  I hire these workers, and the production process and sales lead to a net profit of $1,000,000.00 this year (without taxes).  Suppose that I need to pay 15% taxes on profit.  Then that means, that at the end of the day I will end up with $850,000.00.

Now, what would happen if the government, for whatever reason, wants to lower taxes to provide economic incentives (supposing that my market size remains the same)?  Does it create more jobs?   Not really.  If my market research still shows that all I need is 500 workers, then hiring more workers than that will not give me an economic advantage over my rivals.  As Adam Smith pointed out, the quality of production depends greatly on the ratio between those workers who are actually producing and those who are not (p. 8).  If I hire more workers than I actually need, then that would be a disadvantage in the market.

On the other hand, it is perfectly conceivable that I could use that money to increase my workers’ salary.  Yet, that would not be creating jobs, would it?  All I am doing is keeping the same number of employees, but I would be paying them more.  On the other hand, due to the competition in the market, if my rivals are not increasing their worker’s salaries, then that would mean that increasing my workers’ salaries would be another disadvantage in the marketplace.

So, what did the tax reduction accomplish?  Making me richer … and that’s it.  Let’s say that politicians wanted to reduce the tax rate from 15% to 5%, then I would end up with $950,000.00 profit.  In other words, I would end up with $100,000.00 more without creating a single more job in the process!

Conclusion for Part 1

What we have seen here is just the beginning of how the right-wing (especially the radicals of the Tea Party) completely misunderstand basic economic concepts and how the economy works.  Lower tax rates on corporations, taken on principle and completely decontextualizing the proposal, can be an incentive for industry but in detriment of the public.  There is simply no way that a general policy of tax exemption will create jobs, simply because taxes (or lack of them) have no relationship at all with job creation.  This is because job creation is directly related to market size (supply & effective demand), not to tax rates.

In other words, the key to creating more jobs is to create a market, and, as John Maynard Keynes pointed out, only government has the means, the motive, and the power to create those markets, and turn things around …. even if that means more government spending and debt!  The problem with the federal government today is that it has made little effort in creating these markets through the component of effective demand, spent too much money bailing out corporations which are “too big to fail”, and spent trillions of dollars in a war everyone knew would not be won in the end.  I’m sad to say that both Bush and Obama have contributed to this crisis.

This is not all I have to say about the subject, it is only the beginning.  I want to talk in later posts about the role of tax exemption in the globalized world, and in the U.S.  For now, I leave you with some final thoughts by Bill Maher.

References

Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations.  US:  The Pennsylvania State University.  (It can be downloaded here for free in its entirety in PDF Format).

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One Response to Does Tax Exemption Create Jobs? Not Really! – Part 1

  1. Katherine says:

    A wonderful commentary my friend! Less spent on a war we do not belong i and more spent on our people is a wonderful idea.. just highly unlikely as it would not line the pockets of the powers that be…
    I look forward to reading more of your thoughts on these issues

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