The incoming administration and Congress promise to create jobs by cutting taxes on the wealthiest Americans – the “job creators.” Skeptics of this policy claim that lowering taxes on the wealthy does not guarantee job creation. However, there is a way for this policy to work. It just involves some new thinking on a familiar topic.
During a debate, Trump defended his goal of lowering the top individual tax rate from 39.6% to 33% by saying, “I’m really calling for major jobs, because the wealthy are going create tremendous jobs,” he said. “They’re going to expand their companies. They’re going to do a tremendous job.”
While stimulating job growth a laudable goal, there is a problem with trying to make it happen simply by cutting taxes on the rich. When the wealthy get more money in their pockets, they may or may not spend or invest it in ways that create American jobs. They may buy imported products or put money into the stock market, which has little impact on the actual wage-earning economy. They may invest it overseas. They may put it into private equity firms that actually destroy jobs. None of these actions will produce employment for Americans.
What if there were a way to guarantee that tax cuts on the wealthy would be invested in job-producing American enterprises? This is definitely possible with the right policy approach. One way to accomplish this objective would be to create a new class of government debt called a “US Industrial Development Bond.” These bonds would be completely tax exempt. The purchaser could deduct the price of bond from his or her income taxes. Interest would be tax exempt. Wall Street banks could sell the bonds, allowing them to get a piece of the action.
US Industrial Development Bond funds would be lent to corporations or organizations that can demonstrate job creation for Americans. If they cannot show net new hiring or wage growth, they will not be eligible to borrow from the program. Other, similar approaches could also work. For example, there could be private investments certified by the government as guaranteed job creators which could also be tax deductible, sort of like the current empowerment zones and so forth.
Here’s the catch: The wealthy Americans would be required to allocate a portion of their tax cut to these bonds. Let’s say you earn $1 million a year. Your income tax would drop from $396,000 to $330,000. You now have a $66,000 tax cut. The law might require you to spend 20% of your tax cut ($13,200) on US Industrial Development Bonds. You could buy more bonds, of course, and cut your taxes even further – creating more jobs while ensuring yourself a government-backed income stream.
Mandating that 20% of the tax cut be used to purchase US Industrial Development Bond would create a true job-creating investment of $13.2 million per $1 billion in tax cuts granted. That might not sound like much, but it’s likely a better deal for job creation than just letting the wealthy take their money and run.