You want tax cuts? Cough up those jobs

On Saturday, Congressional Republicans once again blocked the extension of unemployment benefits to over 9 million Americans in the coming 12 months (2 million right away), mostly because Democrats stuck to their guns about expiring the Bush tax cuts on the wealthiest 2 percent of Americans.

Calling the Democrats’ insistence on keeping unemployment benefits extension in the mix without directly offsetting the cost “political maneuvering,” Senate Minority Leader Mitch McConnell said this from the Senate floor: “According to the strange the logic of Democratic leaders in Congress, the best way to show middle class Americans that they care about creating jobs is to slam some of America’s top job creators with a massive tax hike.”

There’s a fundamental problem with McConnell’s statement — that 2 percent of Americans doesn’t create jobs. They own or work for companies that do. Corporate taxes have fallen steadily for 40 years (35 percent now, as opposed to the 1969 high of 52.8), but probably still not as low as they need to fall in order to spur massive hiring, new technology investment and a reduced dependence on foreign labor.

In study after study, only a decrease in corporate taxes has been shown to pay for itself in overall increased tax revenue and job creation. There’s a significant body of evidence that suggests personal tax breaks are best used for relieving financial burden on individuals and tweaking, but not dramatically transforming, consumer spending. The Peter G. Peterson Foundation recently released a good primer.

Back in the real world, away from think tanks and axiomatic blustering, U.S. unemployment has risen almost every quarter since February of 2008 – from 4.8  to 9.8 percent, while corporate profits are on track for a blockbuster year in 2010 — $1.6 trillion, according to the U.S. Bureau of Economic Analysis. The money to hire is there, but Potter’s not selling, Potter’s buying. And holding his personal income tax down is not going to make him create jobs.

Ironically, the extension of the tax cuts is also unfunded. The argument is that we need to keep them because it’s the right thing to do – increasing the tax burden on anyone in a bad economy is considered counterproductive, even inhumane.

Not the case, apparently, for supporting about 1 in 10 Americans teetering on the edge of ruin with the princely sum of about $300 a week (after, yes, taxes). Those tiny checks that somehow keep millions of American families under a roof and at least a meal away from starvation are fair game.

But not even the wealthiest 2 percent believe that holding their taxes 4.9 percent lower will spur them to take their personal savings and create five million jobs with it. That’s all for the cameras.

At the heart of this particular argument – whether it’s mandatory to offset a budget deficit with higher income tax rates – is an outdated and ineffective tax code, addressed most recently in the instantly-dead Bowles-Simpson Deficit Reduction Report. But it’s just a piece of the larger puzzle in terms of reassembling our broken federal budget. Ultimately, we have to figure out new ways for the U.S. government to generate revenue if we’re to hold on to all but its most basic functions.

Sooner than later we need an overhaul of the tax system, one that distributes tax burden and forecasts revenues more accurately. But for now we have the system we have, and the problems we face are immediate. So, like we would tell our children, we’ve got no choice but to attempt lemonade. In this case, without sugar.

Footnote: By the end of this week, it’s likely that all the Bush tax cuts will have been extended two years in exchange for the continuation of unemployment benefits, pushing the final decision into a presidential election year. Whether this is the soul of short-term compromise or the planting of a deliberate powder-keg issue for 2012 is something we’ll know soon enough.