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THEJOBCREATORS
D. F. PAULAHA, PH. D.How many jobs
Could a job creator create
If a job creator
Could create jobs?
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THEJOBCREATORS
Thou Shall Not Tax The Job Creators!
The eleventh commandment?
Dennis Paulaha, Ph. D.
Patron Books
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Copyright 2011 by Dennis Paulaha.All rights reserved. No part of this book may bereproduced or transmitted in any form or by any meanselectronic or mechanical, including photocopying,recording, or any information storage and retrieval systemwithout permission in writing from the author or
publisher.
Printed in the United States of AmericaI H G F E D C B A
Downloaded free from paulaha.com
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How many jobs
Could a job creator createIf a job creator
Could create jobs?
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Thou Shall Not Tax The Job Creators!
The eleventh commandment?
Some people argue we should not tax the job creators.
It is not a bad idea.
The catch is: If we are going to not tax the job creators,we have to know who the job creators are.
Republicans, who say they do not want to tax the job
creators, want everyone to believe that big business
and the very wealthy are the job creators, which is
why they are against raising taxes on big business and
the very rich.
But they're wrong.
The real job creators are consumers.
A business with no customers cannot create jobs,
because it cannot sell anything. Give it a tax break,
and it still produces nothing. Create customers, and it
will hire workers.
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That is why trickle-down economics never works.
It is also why any policy that helps big business andthe very rich at the expense of consumers (the real job
creators) costs our country jobs.
That is not a political idea. It is the explanation given
in every economics textbook that exists.
D. F. PAULAHA
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1
A new beginning
It was in the 1980s that Ronald Reagan, with the
academic backing of Arthur Laffer and his Laffer
Curve, initiated the idea of trickle-down economics as
a way to help an economy that was not doing well. It
was a throwback to the supply side economics of the
1800s, and a refutation of modern economics.
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The Laffer Curve was based on the idea that tax rates,
if they are too high, can reduce economic activity and
economic growth. And if that were true, then
reducing high tax rates would increase economic
activity and economic growth. An important part of
the argument was that by increasing economic
activity, tax collections would also increase. Therefore,everyone would win. The reduction in tax rates,
which would reduce tax collections, would also
increase economic activity, which would then
(meaning some time in the future) increase
government tax revenue. It was a good idea. Reduce
tax rates, which will create both a deficit and
increased economic activity; and the increasedeconomic activity will create profits and jobs, which
will increase tax revenues and wipe out the deficit.
D. F. PAULAHA
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Who could not like an idea where everyone wins?
There were, however, problems putting the idea into
practice. The most important, which had been
described by Milton Friedman when he looked at the
Kennedy tax cut years earlier, was that regardless of
the expected benefits of a tax cut, if the tax cutincreases the deficit, then dealing with the deficit will
be detrimental to economic growth and economic
activity. In other words, the expected benefits of a tax
cut may never see the light of day. In Reagan's case,
after taxes were reduced, taxes were then increased
again, because the hoped for benefits were not
immediately visible, but the detrimental impact of thedeficit was.
D. F. PAULAHA
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!There are other flaws in the academic logic of theLaffer Curve. But whether or not the Laffer Curve and
the Reagan tax cut were flawed, most people seem to
remember them fondly. The problems with the Laffer
Curve and the fact that President Reagan raised taxesafter lowering taxes are mostly forgotten.
What is remembered is one or another version of the
big idea. The big idea being: Thou shall not raise taxes
on the job creators.
D. F. PAULAHA
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2
Why not tax the job creators?
The argument against taxing the job creators is an old-
timey economic argument that was a core belief of
economists from the 1700s and 1800s into the early
1900s. The long-held idea, which is part of the supply-
side economic thought process, is that the key to
production, employment, wages, income, profits, etc.
is supply (meaning producers). It was the original, "If
you build it, they will come," idea.
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The idea, which was at the center of what is called
Classical Economics, is that if producers produce
things, they have to buy or pay for resources and
labor to do so. Therefore, the argument continues, it is
the very act of production that creates the incomeneeded to buy what is produced. It is an idea that,
even today, appears to be somewhat logical. Of
course, the argument was dismissed in the middle of
the Great Depression when even non-economists
could see that just because someone produced
something, it did not mean anyone would buy it. Or
buy all of it.
D. F. PAULAHA
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But Reagan brought the idea back to great applause,
and tied it to the idea that government is evil. Why is
government evil? Because, according to the old-time
supply-side argument, the only thing government can
do is get in the way of private producers who are
doing all they can to make the country great while
employing as many workers as possible and payinggreat wages. (Well, that is not exactly true. In the good
old supply-creates-its-own-demand days, economists
followed Adam Smith's belief that while
industrialization would increase the wealth of the
nation, most workers would remain poor.) Most
important: Way back then, as well as now, it was and
is argued that one of the most important waysgovernment hurts corporations and the very wealthy
is by making them pay taxes.
D. F. PAULAHA
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Of course, all but the very poor pay taxes. Well, that is
not really true. The truth is that the very poor pay a
lot of taxes. They pay sales taxes. They pay property
taxes even if they do not own homes, because thelandlord uses part of the rent to pay the property
taxes (and because rental properties are often taxed at
a higher rate than owner-occupied properties, the
poor can pay more). The poor pay taxes on
automobile registrations. They pay gasoline taxes.
They pay excise taxes added to the prices of many
products. And so on.
D. F. PAULAHA
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When it comes to the Tax Commandment, however,
the new idea focuses on income taxes for both
wealthy individuals and the largest corporations. It is
not quite clear who came up with the idea that the jobcreators are not only producers, but also the very rich.
But it is an idea the very rich enjoy.
D. F. PAULAHA
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The Tax Commandment argument is pretty simple
(no surprise there). Every dollar in taxes thatproducers are forced to pay is one less dollar they can
(substitute "will" in political arguments) use to
employ more people; or invest in things that will also
employ more people. That, of course, is the main
selling point for the idea (and it is an idea that does
have to be sold over and over again in order to get
people who do not make much money, but do paytaxes, to happily sacrifice their own well being and
the well being of their children so that the rich do not
have to pay too much). In terms of advertising
campaigns, the Tax Commandment is, without a
doubt, one of the most successful campaigns in
history. Getting someone to buy a Coke or a Pepsi or a
box of soap is trivial compared to getting people(adults?) to believe that they and their children will be
better off if they pay taxes so the corporations and the
very rich - the job creators - do not have to.
Of course, the advertisers do not call it advertising.
They call it economic truth.
And that is the big error.
D. F. PAULAHA
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3
The big error
Like many ideas that catch on with the Americanpublic, the Tax Commandment sounds pretty good as
long as the advertisers are not forced to answer
questions. To be more precise, there is really only one
question that matters. It is: Who are the job creators?
The Tax Commandment guys think they know the
answer. And they think their answer is backed up by
the economics profession. Their answer, as we already
know, is that the job creators are private businesses
and the very rich.
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And that is the error. The really big error. The biggest
and greatest error to have ever become part of theAmerican mind (whatever that is).
D. F. PAULAHA
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Anyone who wants the real answer to the question
can find it in any of the hundreds or thousands of
economic textbooks published since the end of WW
II. Not just in some. In all. In terms of the economics
profession, this is not a debatable question. (Ofcourse, the economics profession includes some folks
who do not know too much about economics.)
The answer is: Consumers are the job creators.
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Businesses do not create jobs. Businesses hire people
and resources to produce goods and services they sell
to consumers. Without consumers, business sells
nothing, and there are no jobs. Even if it is true (and itis) that consumers are the job creators, part of the Tax
Commandment is the idea that a decrease in taxes
will give businesses and rich people more money they
can use to expand production, which will then create
jobs.
D. F. PAULAHA
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That idea is also refuted in every economics textbook.
In fact, it is a common question on Principles exams.
The question is: Will a decrease in corporate income
taxes lead to an increase in production?
The answer is, No. Why? Because economists assume
that producers operate at an output level thatmaximizes their profits. And because businesses pay
income taxes on profits, a change in tax rates does not
change the output level. It only changes how much
money they can take to the bank. The only things that
cause businesses to increase output and employment
are a decrease in the cost of production or an increase
in customers (supply and demand). Taxes are not acost of production, which is why changing income tax
rates does not affect output or employment.
D. F. PAULAHA
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It is pretty simple. Which is why anyone who took
even one economics course knows that is the correct
answer. Of course, economic textbooks are not alwayseasy to read. So here is how three real businesspeople
explained the economic argument in a June 4, 2011
Huffington Post article titled "Small Business Owners
Demand Repeal Of Bush Tax Cuts."
D. F. PAULAHA
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Rick Poore, owner of Designwear, Inc., a screen-
printing business based in Lincoln, Nebraska: "We are
fed by our consumers, not by our tax breaks. If youdrive more people to my business, I will hire more
people. It's as simple as that. If you give me a tax
break, I'll just take the wife to the Bahamas."
D. F. PAULAHA
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Lew Prince, owner of the Vintage Vinyl record store in
St. Louis, Missouri: "The economic premise, that
people won't hire because they might have to paymore taxes if they make more money, is beyond
laughable. You hire when you think there's a way you
can make more money with that hire. The percentage
the government takes out of it has almost nothing to
do with it."
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Michael Tehan, owner of Espresso Resource, a
company that supplies parts for espresso machines
(and who has an annual income above $250,000,
which places him in the two percent of smallbusinesses that actually get a tax break from the Bush
Tax Cut): "What we do in business, how we spend our
money, how we allocate our resources -- that has very
little to do with tax policy. I map my business based
on my customers, and what my customers want to
buy, and what they can afford to buy."
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According to the textbooks, the same is true for large
corporations. It is the economic condition of
consumers, not corporate or business tax rates, that
affect hiring and investment; and it is after-tax profits,
not tax rates, that matter to any real business.
Which leads to the conclusion that following the TaxCommandment means not taxing the people
(consumers), because it is the people who are the job
creators. Hurt consumers and you hurt business. Give
business a tax break at the expense of consumers and
you hurt business. Improve the economic position of
the people and you help business. Are major U.S.
corporations setting up production in other countriessimply to avoid taxes? Not if you listen to what they
say. They say they are moving to other countries
because that is where the consumers are.
D. F. PAULAHA
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4
Taxes and investment
But what about investment? If corporate income taxrates are lowered, corporations will have more money
to invest. Right? Yes, they will. But will they invest it?
The answer depends on economic conditions and on
who pays for the the corporate tax break.
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If the economy is in a recession, with declining or
stagnant sales, companies will not use their tax breaks
for new investment. They might invest it out of the
country. But if sales are declining, a tax break is notlikely to lead to increased investment and new jobs.
D. F. PAULAHA
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Just as important is who pays for the corporate tax
break. If there is a government deficit, it means that
corporate tax breaks are either paid for by those who
actually pay taxes, meaning consumers, or the
government has to borrow money (sell bonds) to
cover the lost revenue. The huge federal debt, as well
as the annual deficits, can be traced in large part togovernment borrowing money to give to corporations
through tax breaks and out and out subsidies. And
that huge debt is hurting business. Also hurting
business is the fact that tax breaks for business and
the wealthy have hurt consumers, who are the ones
paying for the benefits to the wealthy.
D. F. PAULAHA
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5
Consumers are the real job creators
According to The New York Times, General Electricdid not pay any taxes last year. "The company
reported worldwide profits of $14.2 billion, and said
$5.1 billion of the total came from its operations in the
United States. Its American tax bill? None. In fact,
G.E. claimed a tax benefit of $3.2 billion."
Pretty good for GE, which, like many large
international corporations, is doing more than half its
business outside the US. But why is the American
public so happy to pay taxes so that GE does not have
to? And to even give extra money to GE? Because of
the sales pitch. The American public feels good about
losing jobs and losing homes to foreclosure becauseGE is a job creator. And no patriotic American wants
to hurt the job creators.
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But that is not true. GE is not the job creator.
Consumers are the job creators. And GE is finding
more job creators (consumers) outside the US than
inside.
General Electric is not the bad guy. General Electric isa producer that has done a good job finding
customers for what it makes and sells. But that does
not mean American workers should pick up GE's part
of the tax bill.
D. F. PAULAHA
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6
President Obama followed the Reagan trickle-
down economic plan
Why has the Obama administration, with all thesmart guys from Harvard, failed to turn the economy
around?
The Obama team took over with the economy in a
recession, intending to fulfill a campaign promise to
make things better. On one hand, they did; the
economy stopped its steep decline, bankruptcies
ended, and corporations began reporting record
profits. On the other hand, employment is growing
slowly. Very slowly. Possibly too slowly for the
Democrats to do well in the 2012 elections.
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What went wrong? The answer is simple: The Obama
team followed the trickle-down economic policies
brought back from the dead by Ronald Reagan. And,
as everyone should know by now, supply-side
economics does not work in the real world, becausethe entire supply-side, trickle-down economic idea is
based on the false premise that corporations and the
very wealthy are the job creators.
D. F. PAULAHA
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To be more accurate, supply-side economics, based on
the idea of deregulation and cutting taxes for the very
rich, does help those who receive its direct benefits.
The bailouts and corporate loans saved many large
companies. And because of the fact that even in themiddle of a terrible recession, more than ninety
percent of the American people still had jobs, many
corporations saved by the Obama team ended up
making huge profits.
D. F. PAULAHA
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The part of supply-side economics that does not work
is the trickle down part. That is why unemployment
remains at an unacceptable level and why wages are
falling in many industries. It is also why home
foreclosures have not been stopped.
In simple terms, the Obama recovery or stimulus plandid not help employment and stop foreclosures
because, instead of helping consumers, it gave
consumers' money to large corporations, with the
idea that if the government saved the big corporations
and the rich folks, corporations and rich folks would
use that taxpayer money to hire workers. Of course,
that did not happen. And it is still not happening,even though many of the corporations the
government saved are making more money than they
ever did.
D. F. PAULAHA
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Why are companies not hiring? For the reason
explained above by business-owner Rick Poore, "We
are fed by our consumers, not by our tax breaks. If
you drive more people to my business, I will hiremore people. It's as simple as that. If you give me a
tax break, I'll just take the wife to the Bahamas."
D. F. PAULAHA
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If GE had paid it's fair share of taxes last year, insteadof paying nothing and receiving more than $3 billion
from taxpayers, would GE have produced less, hired
fewer workers, or shut its doors? Not a chance. GE,
like any business, follows the logic of Lew Prince
above. "You hire when you think there's a way you
can make more money with that hire. The percentage
the government takes out of it has almost nothing todo with it."
In fact, General Electric Chief Executive Jeffrey
Immelt said the same thing when he told the Wall
Street Journal that moving production out of the
country was less about cheap labor than about setting
up production in countries with a growing demandfor their products. In 2000, 30 percent of GE's business
was in other countries; now it is more than 60 percent.
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So did Jim Dugan from Caterpillar (a company with a
market value of $67 billion) when he told the WallStreet Journal that the reason Caterpillar is adding
more jobs abroad than in the U.S. is that their sales are
growing faster overseas than in the US.
D. F. PAULAHA
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In other words, production and employment start at
the bottom, with consumers, not at the top, with cuts
in business taxes. Economies grow and recessions are
turned around not with trickle down economics, but
with trickle-up economics. And companies, large andsmall, "follow the money," meaning they follow
consumers.
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The Obama team made the same trickle-down
mistake with the housing crisis. They helped the big
financial companies that had sold the crooked
mortgages and who might have gone bankruptbecause of their own greed, and let homeowners lose
their homes and go bankrupt. The idea was that if the
government bailed out the big guys, the little
homeowners would also be saved.
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How? There is no possible way to explain how givingmoney to big financial corporations would help
people who could not afford to pay their mortgages
(mainly because the mortgage contracts had built in,
and unjustified, interest rate increases). Why would a
bank voluntarily rewrite a mortgage to reflect current
market prices? It would not? And because the single
greatest financial asset for most families is theirhouse, when market values declined, so did the
wealth of millions of American families. And for the
millions who lost their homes to foreclosure, their
wealth was completely wiped out. Then there was the
stock market collapse that destroyed a large part of
the retirement savings of the average family. Again,
instead of protecting and helping American families,which would then have helped the financial industry,
the government chose to help the banks. As jobs
continued to disappear, because consumers were
being bashed from all sides, foreclosures escalated,
adding even more to the losses of the real job creators.
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The government argument, of course, was that by
saving the big financial corporations, they were
saving jobs. That is partly true. But if the plan had
been to save the big guys by helping the little guys,
the result would have been different. It would have
been better for the country. It does not take muchthinking to realize that the thirty percent decline in
equity in American homes (a greater percentage loss
than during the Great Depression) would have a
disastrous impact on consumer spending. Or that
there was no way tax cuts for large corporations could
make up for the huge decline in consumer spending.
D. F. PAULAHA
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7
If they have to pay taxes, they will leave
What about companies that say they will, or must,move out of a high tax state in order to avoid that
state's high tax rate?
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There are real examples of companies requiring orneeding temporary relief in order to get through
tough times. Ronald Reagan helped save the Harley
Davidson motorcycle company by imposing tariffs on
imported motorcycles. And the US auto industry may
have been saved with the import quotas (technically
voluntary) pushed by the Reagan Administration on
Japanese auto manufacturers. Without the quotas,Japanese manufacturers may have run the American
auto industry out of business. In each of those cases,
as well as the more recent bail out of the auto
industry, the economic action was based on the
argument that a temporary change in market
conditions should not be an excuse to allow American
manufacturers to go out of business.
Harley Davidson survived and became the premier
motorcycle manufacturer in the world.
Without government help, however, Harley Davidson
would probably not even exist today.
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The argument that cutting taxes will help a company
in trouble is not as clear. The reason is that companies
in trouble may not be paying any taxes anyway. More
important is the fact that when a state looks at tax
policies to help business in that state, it must also
focus on the idea that the most important thing it can
do for its small businesses is to help consumers. Asthe people quoted above explained, it is customers, or
sales, that drive business. Taxes are not a cost of
production and, therefore, do not have a large impact
on decisions to hire or expand.
The actual record supports that argument. There are
no solid examples of expansion and increased hiringcaused by tax cuts or tax breaks for large
corporations.
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There are, however, many examples of state tax
policies that benefit the very rich at the expense of
consumers who are the customers of its state's
businesses. As such, policies, intended to not tax the
job creators, end up taxing the real job creators,meaning the consumers, and giving breaks to those
who do not, on their own, create jobs. It is the worst
possible tax policy any state can adopt if a state wants
to have a healthy economy and strong businesses.
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If the argument or idea that companies will move to
states with low taxes made any sense, there would be
no businesses left in the high-tax states of the
Northeast. It does not take much thinking to realize
that businesses exist in every state. The decision tolocate is based on many factors, taxes being only one.
Other factors that are important include the natural
environment, education, government provided
services, and many other things that may be sacrificed
in order to let the very rich avoid paying their share
of taxes.
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Still, companies continue to blackmail states by
threatening to move out if they are not given more
and more tax breaks. Even Harley Davidson, the
company that was saved by government, has done so
in Wisconsin. Whenever the state pays the ransom, it
does so while telling the people (using the same old
sales pitch) that even if they have to pay higher taxesor receive fewer benefits, at least jobs were kept in
their state. Of course, that may not be the case. When
a company receives large tax breaks, others have to
pick up the bill. And that means the people end up
paying higher taxes and higher college costs and
higher fees while also having their well being
diminished. As a result, they, as consumers, buy lessfrom other companies that serve the people of the
state. Which means the state may lose more jobs than
it saved by succumbing to the blackmail threat.
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8
Solutions
The solution to both short-term and long-termeconomic health in the US is to implement economic
policies and tax plans based on the fact that
consumers, not businesses and rich folks, are the job
creators. That is standard free-market economic
thinking. It is textbook economics. It also means that
the Bush era tax cuts that are a major reason for the
growing deficits and national debt cannot be justified
by saying we do not want to hurt the job creators.
Those getting the tax breaks are not the job creators.
Consumers are the real job creators.
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Very simply, economic policies must be judged by
whether or not they add to or subtract from the
wealth and income of consumers. Because any policy
that benefits corporations and the very wealthy at theexpense of consumers may help some corporate
profits, but not others, and not employment.
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It is not very tricky.
Given the fact that consumers are the job creators, we
should expect companies to go where the money is.
That makes sense. It is also why any policy intended
to help the American economy and employment mustbe based on the idea of helping American consumers
first. The economy cannot grow and prosper if it is
damaged by policies that help large corporations and
the very rich at the expense of consumers.
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Fortunately, the economy is not a zero-sum game. In a
growing economy, everyone can win. It is not
necessary for some to win at the expense of others. As
history has proven, the better off consumers are, the
wealthier the corporations are.
The fastest growing consumer base is now indeveloping countries, which is where (and why)many
of America's largest corporations are moving their
business and their production.
There are some jobs being lost to outsourcing, but the
real problem is that US economic policies, including
deregulation, have been hurting American consumerssince the Reagan days.
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Even President Reagan, when he was told that GEwas paying zero taxes (not paying taxes is not a new
policy for GE), called his folks together and had them
eliminate some of the loopholes GE was using to
avoid all taxes. GE ended up paying taxes at about a
32 percent rate. The Reagan/Laffer Curve idea was
not to have corporations and the very wealthy pay no
taxes. It was to reduce what many now believe mayhave been rates that were detrimental to the economy.
The problem was that the Laffer Curve was
mistakenly used to justify tax cuts for only the rich,
while the middle class was supposed to wait for the
benefits to trickle down.
That was not part of the Laffer Curve academic
argument. And it is why the economy continues to
struggle against the tide every time tax policies are
implemented that help the rich at the expense of
consumers.
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On the simplest of all levels, if President Reagan had
tried to help Harley Davidson and the American auto
industry by giving them tax breaks instead of
protecting their customers, they might all have
disappeared years ago.
Most important, of course, is that anytime someone
wants to argue that we should not tax the job creators,
he or she should be reminded that the real job creators
are consumers.
D. F. PAULAHA