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Businesses Can Adapt to Taxes and Regulation

Conservatives are a house divided these days on many issues. But on the core issue likely to determine the 2012 election, the economy, there’s not a millimeter of space between them. Government is the problem and reducing the burdens of taxes and regulation on America’s job creators stands at the top of nearly every Republican presidential candidate’s agenda. That’s the only way to get the economy humming again, fuel new job creation, and bring unemployment down, they contend.

This reasoning is backed up by standard classical economic theory which holds that reducing taxes and regulation frees up resources that could allow businesses to invest and hire more workers, produce more, and in the process generate tax revenues that partially offset lower tax rates.

Conservatives glorify the prowess of businesses as the nation’s great job and wealth creators. They glamorize free enterprise for its innovativeness and competitive “lean and mean” value system. Yet when it comes to dealing with government, whether in the form of taxation or regulation, suddenly the same conservatives see business as powerless and have surprisingly low expectations of owners or managers. Higher taxes and stiffer regulations are “job killers” that “force” businesses to grow more slowly or even lay off existing workers.

But employers do have ways to adapt when faced with higher costs from taxes or regulations. Most obviously, owners and executives can take a little less for themselves. Whereas the average American worker got a raise of $3,500 in inflation-adjusted dollars (from $28,000 to $31,500) over the past 35 years, the top 2 million earners (1.5 percent of all workers) hauled away 45 percent of all real increases in compensation. By 2006, these raises cost their businesses a stunning $680 billion in that year alone—amounting to an average raise of a cool $340,000 annually for each person. That’s practically 100 times the raise that average workers got. The top 10 million earners (7 percent of the workforce) raked in 60 percent of all inflation-adjusted raises. About half of these earners are employers, executives, and managers. One choice businesses have besides giving workers pink slips would be for the highest earners to reduce their take by just a little—say, to annual raises averaging only $300,000 over the period. That alone would free up enough to offset nearly $100 billion annually of other business costs.

The ability of American business to rise to the occasion is nowhere better illustrated than when top tax rates rose under President Clinton in 1993. Far from dampening the economy’s growth, what followed, arguably, was the greatest sustained prosperity Americans had experienced for decades. Twenty-two million jobs were created during the Clinton years. When President Bush cut tax rates in 2001, the opposite occurred. The economy and job creation both grew, but at their slowest rates since the Great Depression of the 1930s. This, despite the powerful housing boom at the time.

American history shows that there is nothing close to a straight-forward relationship between tax rates or regulation and economic growth. So does recent global history: A number of European nations with higher tax rates and more regulation have had more robust levels of economic growth over the past two decades than the United States.

The next time a conservative (or classical economist) speaks about “job killers” and shouts that tax hikes or stiffer regulations will necessarily compel employers and managers to cut jobs, or prevent them from creating new ones, remember that owners and managers have choices. There generally are other routes available to them, certainly to the best of them, that can effectively save and even create more new jobs. For our economy to move ahead in a healthy way, businesses must be evaluated as a success or a failure more by this standard rather than solely by the conservative and classical economic standard that treats businesses with kid gloves and does not ask or expect anything from them.