The 9-9-9 solution or the 7-point tax plan: impacts of tax cuts on job creation

by Robert Wayland, Economics of Business instructor

Editor’s note: This is the third of 3 posts by Robert Wayland, instructor of Economics of Business at Harvard Extension School, on job creation and different tax plans. Throughout the presidential race we’ll be writing about what it takes to become the commander-in-chief.  

Do tax cuts make a difference to businesses in term of then hiring more workers?

Yes, generally. The firm creates a job when it expects that the net cash flow from the worker’s effort will be positive. A tax cut, all else equal, will increase the expected net cash flow from productive effort and sales. This is necessarily an exercise in decision-making under uncertainty. So, if the firm thought there was a 50/50 chance the new job would produce profits at a 35 percent tax rate it might think the odds were better, say, 75/25 at a 25 percent tax rate.

Some forms of tax cuts might distort the choice between capital and labor inputs. For example, proposals to favor capital goods by permitting immediate write-offs might skew the choice between employing more labor or more capital.

Do plans like the 9-9-9 plan (which called for a 9 percent income tax, a 9 percent sales tax, and a 9 percent corporate tax) and Romney’s 7-point plan actually aid job creation?

The devil is in the details. I really didn’t pay much attention to 9-9-9 and thought it was too gimmicky. Romney’s plan has been reviewed by a number of organizations and opinions vary, but several indicate that it would likely increase the deficit significantly and benefits mostly higher income people. (In fairness, if you cut taxes significantly you can’t help but benefit the people who pay most of them—higher income people.)

Of course, Romney and his advisors are trying to stimulate growth and dropping rates, especially on those who invest, is a legitimate approach. Unfortunately, you may add to some job destroying factors, the deficit, and expected inflation, while trying to facilitate growth. I don’t think anyone knows what the net effects will be. In general, I think that tax engineering is too complex and the results too uncertain. I think low rates, broad bases, and simple structures are better than “targeted” cuts.

Do you think raising the debt ceiling hampered job creation at all?

No. It was a political chit that was used to gain some concessions from the administration, but slamming the door on financing the government, especially for any significant period of time, would have produced undesirable effects and hurt the recovery. Standard & Poor has already downgraded our debt and demonstrating that we can’t manage our finances responsibly would confirm their judgment.