Between the time the most recent recession started in December 2007 and the bottom of the recession in June 2009, the U.S. economy lost over 8 million jobs. Congress passed President Barack Obama’s $787 billion economic stimulus package in February 2009 and the economy began adding jobs in the summer, but the unemployment rate remained over 9.0 percent until the fall of 2011. In November 2010 the President again sent the Congress a jobs package calling for over $450 billion in new spending and tax cuts to stimulate output and create new jobs. The Republican Congress resisted and refused to pass the program because it contained tax increases on those earning over $1 million a year. The tax increase was proposed as a way to pay for a tax cut in the Social Security payroll tax for middle and lower income Americans. Republicans argued that the tax increase would reduce incentives for “job creators” and would actually kill jobs and prolong the negative effects of the recession.
Republican House leader Eric Cantor (R, VA) argued on Fox News Sunday in November 2010 that, “I am not for raising taxes in a recession, especially when it comes to the job creators that we need so desperately to start creating jobs again.” House Speaker John Boehner (R, Ohio) and Senate Minority Leader Mitch McConnell (R. Ky) have made similar arguments in an attempt to link the proposed tax increase to job destruction. But who are the “job creators” and is the term “job creator” really a synonym for “millionaires” or “rich”? Are all those taxpayers (or even a majority) who earn annual incomes of $1 million or more really the same as those who can be counted on and expected to create the new jobs the economy so desperately needs? Republicans have also used the job creator title to argue that tax increases on millionaires would affect primarily owners of small businesses who are believed to be the real creators of most new jobs. But, again, are small business owners, millionaires, and job creators really all the same group of people?
Republicans used the job creator argument again in December 2010 during the negotiations over extending the Bush tax cuts for an additional two years. While Republicans argued for a balanced federal budget, they also argued for extending the Bush tax cuts of 2003 that would add an additional $4 trillion to the deficit over the next ten years. Republicans wanted to extend the tax cuts but balance the budget through reductions in government spending that would more than offset the revenue lost from extending the tax cuts. During that period the President argued for allowing the cuts to expire for all taxpayers earning over $250,000 a year, but extending them for those earning less than $250,000. Again, Republicans argued that allowing the cuts to expire for the wealthy would result in a tax increase on small business job creators First, who are the taxpayers who earn annual incomes of $250,000 or more? And are they likely to be the same or similar group that earns over $1 million a year? Unfortunately, available tax statistics do not provide detailed information for those in these tax brackets. We know in great detail the characteristics of those who earn less than $50,000 a year, or those in poverty, but we know only general information about the super rich. We do know they are likely to fall into several categories: 1) corporate executives, 2) investors and speculators, 3) small business owners, 4) professionals in such fields as medicine and law, 5) sports and entertainment stars, and 6) those of great wealth who live off of dividends and interest. Of those, investors, speculators, professionals, entertainers, and the very wealthy may hire some personal assistants and household staff, but they are not likely to increase employment based on shifting tax laws. That leaves corporate executives and small business owners as the primary potential job creators from the ranks of the very wealthy.
The Nobel Prize winning economist Milton Friedman from the University of Chicago was a lifelong advocate of allowing the free market to operate unrestricted by government intervention. He also argued that the only responsibility of business owners and corporate executives was to earn a maximum profit for themselves and/or their stockholders. They did so by providing a product or service at a competitive price. The “invisible hand of competition” originally spoken of by Adam Smith, would guarantee that those who seek their own private interest would also maximize the public interest. The public would benefit from the lowest possible competitive prices, and the economic system would allocate resources to the most profitable and efficient uses. Government interference with the system would only result in inefficiency and increased costs of production. This free market philosophy clearly forms the basis for modern Republican thought and policy, and, indeed, forms the basic economic model currently taught in most economics courses throughout the world. But the model also ignores several important truths about how the system actually works. First, the absence of government does not guarantee a free market or competitive result. The creation and expansion of monopoly power by the largest and most powerful in the system leads to monopoly profit and expanding political power. Second, the goal of maximum profits assumes that labor (and any other resource) is simply a cost of production that needs to be minimized if overall profits are to be maximized. Expanding employment and consumer satisfaction are desirable side effects, but they are secondary goals reached only as they contribute to the overall profit maximizing goal. Third, if government power can be channeled by business interests to protect and ensure monopoly profits by restricting competition rather than promoting competition, economic and political power can both be maximized.
While large corporations are still the largest overall employers, the past thirty years have seen a trend toward expansion in foreign markets, with minimal or negative employment growth within the U.S. Multinational corporations have fueled their growth and rising profits by expanding into international markets. Growth at home has come primarily from absorbing smaller competitors, which has often led to decreased domestic employment while overall profits are rising. The biggest job creators over the past thirty years have been new startups that survive the first few years and then expand rapidly. In the eighties that meant Microsoft and Oracle and Apple; in the nineties it was Amazon, ebay, and Google; and in the new millennium it was Facebook, Twitter, and Groupon. In each of these cases new startups brought new and exciting technology onto the market and then grew into multinational corporations, creating thousands of new jobs in the process. Meanwhile most large multinationals were expanding overseas and closing factories in the U.S. while creating most of their new jobs in foreign markets. The net change in U.S. private employment for selected years is shown in Table 1. The period of 1993-94 was the beginning of the nineties expansion, while 1999-00 was at the end of that expansion. The period of 2002-03 was the beginning of the Bush expansion, while 2004-05 was the last year than employment statistics are currently available.
Table 1Net Change in U.S. Employment
Period Total Change Less than 20 Less than 500 More than 500
1993-94 1,944,460 1,311,540 1,593,350 351,1101999-00 3,359,419 1,593,466 2,505,712 859,707
2002-03 995,659 1,573,462 1,990,376 -994,667
2004-05 1,241,428 1,026,394 979,102 262,326
Source: 2009 Small Business Economy: A Report to the President, SBA Office of Advocacy
In the earliest period, small business (those with fewer than 20 employees) accounted for 67.5 percent of the net change in employment, while the largest firms (those with more than 500 employees) accounted for only 18.1 percent of the new jobs. By the end of the nineties expansion, small firms accounted for 47.4 percent of new jobs, but large firms accounted for only 25.6 percent of those jobs. The majority of jobs in 1999-2000 (74.6 percent) were created by firms with less than 500 employees (which includes those with less than 20). By the early Bush years large firms decreased employment by almost one million, while the smallest firms added over one and a half million workers. By the middle of the decade the smallest firms were still the largest job creators, adding over 1.2 million jobs, while the largest firms added only 262,326, or 21.1 percent of new employment. While employment details by firm size are not currently available for years after 2005, total employment numbers show that employment grew by 3.5 million workers from 2005 to 2007, but then declined by 7.6 million from 2007 to 2010, an overall decrease of 4.1 million jobs, or 3.7 percent. For the entire decade the economy grew from 2001 to 2007 by 4.7 million before the recession began in late 2007. The biggest declines in employment came in manufacturing (-16.1 percent) and production of goods (-19.1 percent), but manufacturing employment has been declining since before 1990. Retail trade employment increased slightly from 2001 through 2007 before declining by 6.9 percent following the recession. Health and education added workers throughout the decade, even adding over 1.2 million jobs during the recession.
It is clear that the biggest job creators over the past twenty years have been small businesses that employ less than 20 employees. But are these employers also synonymous with “millionaires” or the “rich”? A 2011 study by the Treasury Department (1) attempted to identify small businesses and their owners according to their tax filing status by examining those taxpayers who filed one of six different forms that could be viewed as representing small business owners. The six forms were Schedule C, form 1040 for Sole Proprietors, Farmers, or Miscellaneous rental or real estate income, Form 1065 Partnerships, Form 1120 for C Corporations, and Form 1120S for S Corporations. The study attempted to determine which of the above filers were actually small business owners, and which were passive investors or hobbyists not engaged in actual business activities. For example, some individuals claim a tax loss for activities more properly characterized as a hobby, or for the receipt of interest, dividends, or capital gains, but conduct no business activity. Some rental income may be incidental rental of a vacation home, and many partnerships, C and S corporations are passive investment vehicles that merely pass through interest, dividends, or capital gains income but also conduct no business activity.
The study required a filer to also claim $5,000 or more in business deductions as a test to determine whether business activity was actually being conducted. Only 54 percent of taxpayers who filed one of the six business tax forms qualified as a small business in 2007, and, of those, slightly more than one-fifth conform to the definition as an employer. These filers represented only 17 percent of total business income. Twenty million taxpayers reported a total of $376 billion of net business income as small businesses in 2007. Only 8 percent of small business owners reporting 57 percent of net business income had AGI of over $200,000.This study makes it clear that not all taxpayers who file tax forms showing business income or loss are actually conducting business operations or represent potential or current employers who would be expected to add employees if their after-tax incomes were to rise. The recession has led many small employers to reduce their workforce and become more efficient with fewer employees. Increased profits will not automatically lead to the rehiring of earlier workers unless the business is also expanding output and sales. The same can be true for large corporations, who have trillions of dollars in current liquid assets and rising profits but are slow to add new employees.
The study also proves that not all taxpayers earning more than $200,000 (or more than $1 million) are small business owners who do the majority of the new job creation. Increased taxes on millionaires, or even the wealthy, are not likely to lead to significant hardship on “job creators” because most of the real job creators do not fall into those categories. Furthermore, increased after-tax profits through new tax cuts will not automatically lead to new employment, especially by large corporations with substantial overseas operations. New employment comes from expanding output and sales, which could also lead to increased profits. But greater profits may also lead to increased incomes for business owners and/or corporate executives, increased stock buybacks, or increased retained earnings. Businesses will not increase total employment unless they expect increased sales and demand for goods and services. Profits that result from increased efficiency or decreased taxes have only a marginal expectation of resulting in new employment.Output and sales increase when there is an increase in demand for the company’s products or services, and demand increases only when there are new or returning customers, and customers without jobs or who are fearful of losing their jobs will not increase consumer spending. Tax cuts for the wealthy or for large corporations will make incomes for the few much greater, but will not likely lead to new employment. Tax cuts for the consuming middle-class are much more likely to lead to increased demand and new business expansion and new employment. Consumers are the real “job creators”, but only if they also increase demand for those products and services that put Americans to work. The purchase of a new Lexus made in Japan benefits Japanese workers, while the purchase of locally produced products and services is likely to impact local small business employment.
1.“Methodology to Identify Small Businesses and their Owners”, Office of Tax Analysis, U.S. Treasury Department, August 2011.
