A standard right wing talking point is that tax cuts for the rich and corporations create jobs.
The tax cuts’ two bills, in 2001 and 2003 – changed laws so that personal income tax rates were reduced, exemptions for the Alternative Minimum Tax increased, and dividend and capital gains taxes also cut.
Yet in the debate, it seems of no moment to either side whether the tax cuts were effective in achieving their goal of spurring business investment and making the US economy more competitive.
Our own examination of US non-residential investment indicates that the reduction in capital gains tax rates failed to spur US business investment and failed to improve US economic competitiveness.
The 2000s – that is, the period immediately following the Bush tax cuts – were the weakest decade in US postwar history for real non-residential capital investment.
Not only were the 2000s by far the weakest period, but the tax cuts did not even curtail the secular slowdown in the growth of business structures.
The logic of this is simple enough. If you have money to invest, you're going to invest it where it'll return the most. Right now and in the past couple decades that is either in leveraged financial games, or it is in economies which are growing fast and have low costs. The US does not have high growth compared to China or Brazil or many other developing countries. It has high costs compared to those countries as well.
If you can build a factory overseas which produces the same goods for less, meaning more profit for you, why would you build it in the US?
Until that question is adequately answered, by which I mean "until it's worth investing in the US", most of the discretionary money of the rich will either go into useless speculative activities like the housing and credit bubbles, which don't create real growth in the US, or they will go overseas.
There are a number of ways this question can be answered.
- You could slap taxes on foreign capital flows;
- you could slap tariffs on foreign goods produced in low cost domiciles so that companies have to produce in the US to have access to the US market;
- you could push industries which are hard to outsource but don't actually decrease American competitiveness. The housing bubble increased the cost of doing real business in the US by inflating real estate costs. A massive buildout making every building in the US energy neutral or an energy producer would increase US competitiveness.
- you could try and do what America once did: have a tech boom. If the future is being produced in a country then everyone has to invest there and when things are changing fast you can't offshore production, because speed matters and offshoring is slow. This is why real wages increased during the tech boom of the 90s.
There are other answers as well, but the point is simpler: you must answer the question "why invest in the US instead of a low cost, high growth country?" Until you answer that question tax cuts will not only not do any good, but in a sense will do harm, by increasing the speed at which jobs are offshored out of America.