The Rich Do Not Create Jobs

The rich are not job creators

The idea that the rich are the job creators in the economy is one of the most common myths in American politics. It is said that raising taxes on the rich is a surefire way to induce a recession, slow growth, or prolong economic hardship. But when we look at actual history and data, we see a different story.

Let me be clear from the top: there is absolutely nothing wrong with being rich or wanting to make a ton of money. Those who have worked hard and achieved success deserve respect and admiration. But that does not mean they are "the job creators". That is what this analysis intends to show.

First we will look at the very wealthy and their place in the economy. Then we will look at data on business, employment and taxes. Finally we will analyze the results and draw some conclusions.

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Change in income, 1947-1979

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Change in income, 1979-2009

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Top 10% of earners own 90% of all stocks and bonds, 2007

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There are more rich, and they have more money

There are three main facts about the rich in America:

First, there are more rich people than ever before. In 1978, there were 450,000 millionaires and 1 billionaire in America. These numbers grew massively in the next decade. In 1980, there were 574,000 millionaires. In 1985, 833,000 millionaires. And in 1988, there were over 1.6 million millionaires, and 51 billionaires.

The Boston Consulting Group estimated there were 5.2 million millionaire households in 2010. The Deloitte Center for Financial Services calculated a much higher number: 10.5 million millionaire households in 2011, or almost 9% of all American households. (The difference is caused by differences in how wealth or income is calculated.)

Second, the rich earn more money than ever before. In 1953, executive compensation amounted to 22% of corporate profits. By 1987, it had risen to 61%. Over the last 30 years, the chiefs of American companies have continued to do extremely well. In 1980, the average American CEO earned 42 times the average worker. In 1990, that had grown to 107 times. And the ratio peaked in 2000 at a whopping 525 times.

In 2007 CEO pay was still 344 times the average worker's. In that year, average CEO pay at public companies was $15.1 million. In 2010, it stood at $12 million.

Among the top one percent of earners, average aftertax income more than tripled from under $400,000 in 1979 to over $1.3 million in 2007. Aftertax income of the top 20% doubled, from about $100,000 to $200,000. But the bottom 80% of Americans more or less stayed flat over the period.

Third, the rich own a greater percentage of the economy than ever before. The top 1% of earners have been increasing their share of total national income since the late 1970s. They now account for more than a fifth of total income in the US (see chart at right).

In addition, a "rising tide" has not lifted all boats. The income gains of the richest have far outpaced the gains of other groups. From 1979 to 2009, the top 5% of earners increased their income by 73%. Those in the middle (earning between $48,000 and $73,000) increased their income by only 11%. Perhaps most troublingly, the bottom quintile of earners--the poorest--have gotten poorer. They actually lost about 7% of their income in this period (see charts at right).

This contrasts with the previous thirty year period, from 1947 to 1979, where all levels of society increased their income by about the same amount, the richest five percent actually grew by the smallest amount (86%), and the poorest actually gained the most (116%).

New US jobs since 1939 (1939 to late 2012)

This is the accumulation of jobs added to the economy since Feb 1939. It is NOT total employment. For example, the value for 1980 is 61 million. This means that 61 million jobs were added between 1939 and 1980.
This is the accumulation of jobs added to the economy since Feb 1939. It is NOT total employment. For example, the value for 1980 is 61 million. This means that 61 million jobs were added between 1939 and 1980. | Source

American job creation, 1940-2010

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Job creation over time in America

So clearly we have a lot more rich people. If the rich are job creators, we should have lots of job creation. What do the data actually show?

The US economy added about 104 million jobs from 1939 to late 2012. The first chart at right shows the accumulation of new jobs during this period. The chart shows two important facts. First, the rate of job creation remained quite steady for almost the entire period (particularly since the 1960s), until the year 2000. Second, after the year 2000, there has been effectively no overall change. This lack of job creation is a novel occurrence for the American economy.

The rate of job creation in the late 20th century proceeded at a consistent, steady clip despite the vicissitudes of wars, recessions, Democratic administrations, Republican administrations, and changing tax and fiscal policies.

The second chart at right shows that the 2000s were the first decade in several generations without a significant increase in jobs. It was also the first overall decline in the number of jobs. This is profoundly important for a variety of issues. But for the purpose of this essay, the implication is clear: an increase in the number of wealthy people, an increase in the amount of money earned by them, and a greater concentration of income have NOT had a positive effect on job creation.

There were actually more jobs created in the 1970s--with higher taxes on the rich, fewer rich people, and less income inequality--than in the 1980s. And in the 2000s, with the highest number of rich people ever, and the rich earning the greatest share of income ever, there was actually a net loss in jobs!

If we exclude the 2000s, there was certainly a gradual increase in the number of jobs created per decade in the second half of the 20th century. However, much of this job creation must be chalked up to a growing population. The more people there are, the more jobs will be created, with or without rich people.

US Investment as a Percentage of GDP, 1980-2011

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Unemployment Rate Over Time

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Top Income Tax Rate Over Time

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Investment, unemployment and taxes

Investment

One of the main ways the rich are assumed to "create jobs" is through investment. There are a number of problems with this belief. Investment requires risk taking. Many rich people are perfectly content to receive a steady income, sit on their wealth, and avoid risk with their money.

Among those interested in investing, many will prefer large, established corporations. These are companies with limited growth potential, unlikely to add massive numbers of jobs to the economy (especially if they choose to move operations offshore). In addition, many will invest abroad, which may create jobs, but not in the US.

Only a minority of rich people want to fund risky start ups and bet on small businesses domestically. In the US, investment as a percentage of GDP fell overall between 1980 and 2011. This is despite the meteoric rise in the number of millionaires and billionaires, and the amount of money in their possession, during this period.

Unemployment and Income Taxes

The American unemployment rate has risen and fallen since the 1940s. But overall it has remained more or less flat. If anything, it has slightly increased on average during this time. Meanwhile, the top marginal income tax rate fell dramatically from 1948 to 2012. At its peak in the 1950s, it was over 90%, and it currently stands at 35%.

So, significantly lower taxes on the richest Americans, more rich people, more total money earned by the rich, and a greater share of national income owned by the rich, has not coincided with a significant increase in jobs, nor a significant decrease in the unemployment rate, nor a significant rise in investment.

If the rich were genuinely job creators, we would not see these results.

The rich are not the job creators we thought

Why is it, when the rich have the most money ever, in both absolute and relative terms, that we do not see a massive rise in jobs? Indeed, why is there instead little or no change, or even decline?

The fact is that the rich are not the job creators. If anything, it is those who are in the process of becoming rich that are the job creators.

It's not that being rich makes you a job creator, it's that being a job creator makes you rich.

This helps to explain why states and countries that have very high income taxes on top earners can still have dynamic labor markets with a lot of job creation. Examples of this include Sweden, Denmark and the Netherlands.

Now, can a rich person create jobs? Absolutely. Many rich people create jobs by hiring people, spending on consumer goods, and starting or investing in new businesses. The point is simply that being rich in and of itself does not make one a job creator. A larger paycheck, or a bigger bank account, does not automatically equal more jobs.

Many middle class and poor people can also create jobs by starting a new business and hiring workers, purchasing goods and services, investing in a small business owned by a friend, or putting money in the stock market. The rich do not have a lock on job creation, simply because they are rich.

The worship of the rich, and the fetishization of wealth, so common in modern politics, is clearly unwarranted.

Real job creation

So if throwing money at rich people won't create jobs, what will? Policies that encourage business activity, new business formation, investments in education and training which improve the labor force, enhancements to infrastructure, low sales taxes and VAT taxes, allowing businesses to advertise and promote themselves, and efficient and well-regulated financial markets, among others.

Sometimes high taxes on the rich do accompany economic stagnation. This is not necessarily because of the taxes themselves, but usually because high taxes are often accompanied by other, more powerful, measures that constrain business and job creation.

An overregulated labor market, legal red tape, restrictions on business activity, a complicated process for registering and starting new companies, poor protection of private property from theft and fire damage, poor enforcement of contracts, requirements on businesses to provide health insurance or other benefits to workers, excessive minimum wages or maximum working hours, overregulated financial markets--these are the kinds of measures that restrict wealth creation and job creation. And the kinds of governments that adopt these policies often embrace higher taxes too.

The Rich and Job Creation in the US Economy

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Comments 16 comments

Austinstar profile image

Austinstar 4 years ago from Somewhere in the universe

I shared this to FB and Twitter because everyone who voted for Romney should read this.


ib radmasters profile image

ib radmasters 4 years ago from Southern California

I am sorry but your analysis here is not compelling to the goal stated in the title of your hub.

You say

So, significantly lower taxes on the richest Americans, more rich people, more total money earned by the rich, and a greater share of national income owned by the rich, has not coincided with a significant increase in jobs, nor a significant decrease in the unemployment rate, nor a significant rise in investment.

ib----

First of all the wealthy have the highest tax bracket, and the tax cuts on the wealthy doesn't change that it is still the highest. Second why should there be different tax brackets for income tax? Isn't that unequal protection, and discrimination against a Class of people. Just because the government can levy taxes under the constitution, should taxes trump discrimination?

Yes, CEO s today are overpaid, but that is the province of their stock holders, and not the government.

The real culprit is the Income Tax System period. It makes more problems just to take in revenue. The rich pay the taxes that they do because Congress gave them a passkey, it is called the Internal Revenue Code. Over the years the Congress has taken out the deductions, and credits that could be used by the wage earners, while plumping up those that could be used by the investors. Today, anyone can invest, but the wealthy can make the bigger investments.

Wage earners are forced to pay FICA, and there are progressive tax brackets for them. Investors don't have tax brackets, there is only one level of Capital Gains Taxes, and FICA doesn't apply.

If this is true for Capital Gains then why shouldn't there be one bracket for wage earners?

People making seven figures and more have highly paid CPA firms minimizing their tax liability. They have family trusts, and have their companies provide them with all the benefits they need, just like when the president of the US lives on the country tax dollar.

The best job creators in this country have been the small to medium business startups, and they are funded by private investment companies where the rich put their investment money. It is also a great tax tactic, if the investment fails. If the company they invested in makes it big then they also make out.

The rich don't care about tax brackets as long as they has the Internal Revenue Code written for them by Congress. BTW, the people in congress do fairly well in the rich column.

The other problem is that the government switched from anti monopolies, to allowing companies to merge, or be acquired forming huge companies, and many of them super conglomerate global companies. These companies don't pay their fair share of taxes because of their global play.

So, I would have to give your hub a thumbs down.


secularist10 profile image

secularist10 4 years ago from New York City Author

Cool, thanks Austinstar!


HSchneider 4 years ago from Parsippany, New Jersey

You are right on target, Secularist10. The wealthy are hoarding their money and will continue to do so even with tax cuts. The middle and lower classes must spend every dollar to pay their bills. Without their consumption, the wealthy will eventually lose their wealth because their businesses and investments will go belly up due to lack of demand. Great Hub.


secularist10 profile image

secularist10 4 years ago from New York City Author

IB:

Your comment is interesting but I'm not sure what it really has to do with this topic.

"First of all the wealthy have the highest tax bracket, and the tax cuts on the wealthy doesn't change that it is still the highest."

Yeah... so?

"Second why should there be different tax brackets for income tax?"

Well, we have a progressive tax system in this country for a variety of reasons. For more on that, you can check my hubs arguing in favor of the progressive income tax (under "Related" at the bottom of this article).

But taxes are only one aspect of this issue. There are more rich people than ever in both pretax AND aftertax income, the rich have more money than ever both pretax AND aftertax... yet there is no noticeable effect on job creation.

I agree with much of your analysis on the tax code and the problems with it. Yes, the rich have an undue influence over policy in this country. No doubt about that. But that is not what this article is about. It's about the fact that more rich people and more concentration of wealth has not correlated with more jobs/ more fertile job market, which is what the prediction always is.

"The best job creators in this country have been the small to medium business startups, and they are funded by private investment companies where the rich put their investment money."

Not exactly. Only some small businesses get funding from the rich through vehicles like that. Many small businesses stay small forever, or they grow over time through bank loans and increasing sales.

As I said in the article, rich people who decide to invest have many options, and many choose to invest in big corporations, or in foreign countries.

But you are right that small and medium businesses are the primary drivers of job creation. Which actually supports my analysis--small businesspeople and entrepreneurs tend not to be very rich, so here we see lower and middle class people, not the rich, doing the bulk of job creation.


secularist10 profile image

secularist10 4 years ago from New York City Author

Thanks, HSchneider, and good points. It's quite interesting how so many people think tax cuts are the answer to everything. As if an extra 5 percentage points here or there will be the difference between the apocalypse or Shangri-La. It's ridiculous. The system is complex.


ib radmasters profile image

ib radmasters 4 years ago from Southern California

Secularist

The point of your hub was answered by my comment, you don't think it applies to your hub, but that is because your analysis is wrong.

You glossed over my comments, and cherry picked the ones that you thought you could answer.

For example, Wage Earner versus Investments.

Why do we need a progressive income tax at all?

The government made it so that wealth would be bounded, but that didn't work out. The more we increase the tax on the wealthy the more that they try to avoid it.

If everyone paid the same tax rate, it would be fair, and the wealthy would be more inclined to pay.

Removing the Internal Revenue Code and the Income Tax system would equalize the taxes among the people. A mechanism to do that would be REPLACING the Income Ta entirely with a National Sales Tax, not a Flat Tax. This would be similar to State Sales Taxes already found in most states.

I agree with you on the red tape against businesses etc, and that doesn't create jobs, but it loses at lot of them.


secularist10 profile image

secularist10 4 years ago from New York City Author

IB:

Either I'm dense, or you're not explaining yourself, or both. All of that discussion on taxes is very interesting and important. But I'm not seeing the connection to job creation. Except for the fact that the rich have more money, after taxes, today than ever before, and there is not an increase in jobs or employment as a result. So lower taxes paid by the rich have not translated into more employment.


Austinstar profile image

Austinstar 4 years ago from Somewhere in the universe

I'm thinking a National Sales Tax would mean that the rich could avoid it by buying foreign goods, which they seem to do a lot of anyway.

If all income were taxed at a fixed percentage rate with no deductibles, discounts or loopholes, that would be so much easier to budget for us and the government. I think everyone should pay 10% regardless of how little or how much income they have.

I suppose the rich would still try to hide their money in offshore accounts or something, but if the income was earned by a citizen living here, it wouldn't matter where they put their money. If it's income, it gets taxed, end of story. Then the government would have a fixed income and they would have to live with it. Also, end of story. No more borrowing.


secularist10 profile image

secularist10 4 years ago from New York City Author

Austinstar:

There are a number of problems with a flat tax. For one thing, it does not provide nearly enough revenue to the government. Also, it is simply not as justified as a progressive tax, which is what I argue in my hubs on progressive taxation. In short, a progressive tax is warranted because the rich have made greater use of the socioeconomic system than the middle class or poor in earning their money, so they should pay a greater proportion of that income in taxes.

One interesting idea I read about in the NY Times the other day is replacing all taxes with a wealth tax (either flat above a certain threshold, or slightly progressive). It has the potential to produce much more revenue, and significantly mitigate inequality.


ib radmasters profile image

ib radmasters 4 years ago from Southern California

Secularist

Austinstar was talking about a National Sales Tax and not flat tax.

The flat tax is still income based.

There is no real reason for discriminating on someone else's hard work.

The income tax system is what makes bad business decisions, and this affects the success of the business, including job creations, or more likely job losses.

NY Times article, really a solid source, come on.

We already have state sales taxes, so the mechanism is already there.

All the arguments about sales taxes, are already answered by the state sale tax implementation.

The income tax adversely affects the middle class. They have to pay FICA, and they have few to no deductions to reduce their tax liability. They cannot use the thousands of tax reductions, exclusions and avoidance's contained in the Internal Revenue Code.

The government needs to severely reduce their spending, and the size of the government. Every government employee is a tax liability, as well as every agency and department in the government.

Abolishing Income Tax would allow the removal of the bulk of the IRS, as sales taxes are paid immediately and auditing it is simple.

Remember, it was congress that gave the rich the Internal Revenue Code to use it to gain wealth. Many in congress are wealthy, and they didn't get it with their government salary.

Forget FLAT Tax, it is just a diluted version of Income Tax.

We don't need the rich to support us, what we need is for everyone to pay their fair share, no more, no less. Income Tax doesn't satisfy this objective.


secularist10 profile image

secularist10 4 years ago from New York City Author

IB:

No, she was referring to a flat income tax. Read what she wrote:

"If all income were taxed at a fixed percentage rate with no deductibles, discounts... I think everyone should pay 10% regardless of how little or how much income they have."

The justification for a progressive income tax is straightforward. It's not about "discrimination." It's about the fact that the rich have benefited more from the system. I've already dealt with this topic, as I said, in my hubs on progressive taxation.

The income tax system in this country does cause problems when it comes to job creation. I agree with that. But:

(1) It is not the fact that there is an income tax that is the problem. All developed countries have income taxes, and many of them have much more job creation than the US. Moreover, the US has had an income tax for decades and had better job creation in the past.

(2) There are many other problems that stand in the way of job creation, like all of the things I mentioned in the article--difficulty starting a business, restrictive labor laws, and so on.

I support reforming the tax code and simplifying it.

The NY Times was simply the medium this professor wrote in. Here is the article for anyone interested:

http://www.nytimes.com/2012/11/19/opinion/to-reduc...

He's a professor at NYU.

I don't think a national sales tax alone would produce enough revenue. It would certainly produce a lot, but I don't think it would be enough to completely replace the income tax. You mentioned the states--most states have an income tax in addition to a sales tax.

The income tax does satisfy the "fair share" objective, when it's implemented correctly. Sure, if the rich can deduct away half of their tax bill, that's not fair. But if you eliminate all deductions and loopholes, and make the tax more progressive, so that tax rates rise with ever-higher incomes (right now a person making $300,000 pays the same tax rate as a person making $3 million--the same rate despite an order of magnitude higher), that would be better.

It would help to mitigate inequality and produce more revenue to the government. So we need to raise taxes on the rich and super-rich, and also have higher tax brackets beyond just a paltry $250,000 (which is just middle class in some places).

The concept of an income tax is not the problem. It's the way it is implemented in this country that is the problem.


Sanxuary 3 years ago

We have over 20 years of proof that the rich only makes people poorer. The vast destruction of anyone small is enormous. Consolidation and the declining number of jobs in the process and globalization of cheap labour and resources. The quality of life is in decline and wages have actually fallen over this time. Of course you only need to go back another 20 years to reach the corporate town and monopolies to see how wonderful life was then. The more wealth accumulated by a few people has always lead to poverty on a massive scale and eventually instability. This lesson has been proven for over a thousand years.


secularist10 profile image

secularist10 3 years ago from New York City Author

To the contrary, Sanxuary, there is no proof that the presence of rich people in a society alone makes people poorer in general. The point of this article is simply that they are not the quintessential "job creators."

What we have in the US is a significant rise in inequality and a number of other structural problems in the economy. But other countries with significant numbers of rich people actually have less poverty than the US. So it is a complex relationship.


Sanxuary 3 years ago

There is nothing that favours or benefits the common person in this country. Every lowly farmer and shop keeper has been destroyed and the mountain is even higher to climb today in order to succeed. Every dime you earn to get ahead is taken by the latest rise in profits. It's a con at every level and the math is known and planned from the moment you get an increase in the cost of living, they plan to take it. Pay people a real wage and Capitalism works. When people have money they buy more crap and pay more taxes. Its nothing but greed but spending money makes money and when all the pigs get fed we can afford to be happy.


secularist10 profile image

secularist10 3 years ago from New York City Author

There is a lot of truth in what you say, but a lot flawed as well.

The US is the land of contradictions. There are many opportunities, and new millionaires are minted every day. But there is also an effectively permanent underclass not unlike the serf class of previous ages. Individual citizens can and do make a difference through the democratic institutions of the country, yet the system is overwhelmingly controlled by a rich and well-connected elite. Universities employ "affirmative action" to give the ostensibly least privileged a chance at entry, and yet studies show the elite universities are as awash as ever in privilege and connections.

We have the richest people in the world, and some of the poorest and most destitute.

It's a complex system, but not altogether hopeless. We've seen hopelessness before, and this isn't it.

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