The Mathematics of Budget Cuts and Job Creation
written by Scott Paine
What it takes for things to add up
I’ll happily admit that I would enjoy lower taxes.
I am one of those folks who doesn’t mind paying taxes, however, if the money is used responsibly for the greater good. I’m even willing to allow that some percentage of it undoubtedly will be wasted, and I’m still okay paying taxes. In a multi-billion dollar game, a few hundred thousand dollars are merely the dust that accumulates around the edges of productive work.
I know . . . it would be nice to scoop up that dust!
But this is the reality of large budgets for large organizations, public or private. It makes sense to keep working for less waste, but a degree of waste probably is inevitable, and eliminating it probably not cost effective.
Which leads us to budget cuts.
Governor Rick Scott has proposed a budget that does some remarkable things, like dismissing hundreds of state employees in order to reduce taxes (though it appears there are some problems with the math here, we’ll let it go for today). Taxes are to be reduced, in turn, in order to create jobs.
Hmmm . . .
So we are going to make people unemployed in order to reduce unemployment?
Of course, the underlying logic is that the private sector will pick up the slack. More accurately, the Scott administration apparently believes that the private sector would be hiring a lot more workers in Florida if only the government in Tallahassee took less of their revenue in taxes.
At some level, this clearly makes sense. Simple math suggests that if one cuts taxes enough, companies might use the saved revenue to hire someone. There is a “tipping point” for each individual business where the net revenue increase a new employee would generate, weighed against the cost of the new employee, is positive. If companies are at that tipping point, but lack the cash up front to take on the employee, a tax cut might be just the thing to spur employment. And, of course, a tax cut will be a gift that keeps on giving, helping improve that marginal return.
But for Governor Scott’s plan to actually generate a meaningful increase in private sector employment, there has to be a multiplier effect of some kind. Simply shifting the jobs, 1 for 1, from the public to the private sector does nothing to reduce unemployment.
Where’s the multiplier?
Even more serious, in my judgment, than the absence of a clear multiplier logic here is the reality of what the tax cuts will mean for most businesses. According to Gaebler.com, a website that provides advice and services to entrepreneurs, there are 444,066 small businesses with employees in Florida (more than 70 percent of all small businesses registered in Florida do not have employees). Of course, that’s only the “small” businesses, but most economists will tell you that’s where the new employment action will be.
Okay, so a bit of silly math here will make the point. Let’s imagine that these small businesses are going to be the beneficiaries of every single dime of tax cut in Governor Scott’s budget. Of course, we know this isn’t true. Large companies will draw down their share of the tax cuts, and there are a bunch of those around, too. But let’s pretend the 444,066 are the only ones to get money back through the tax cuts. That’s $2.4 billion divided by 444,066, or a mere $5404.60 per business . . . roughly enough to hire a minimum wage worker with no benefits (and without factoring in the other business costs of having an employee) full-time for about 19 weeks.
This is a gross oversimplification, of course, in all sorts of ways. But it makes a point. Even the kind of tax cuts that sound huge (and that seem likely to put us considerably deeper in debt as a state), when they get down to the cash register level of the businesses of Florida, aren’t enough to bump unemployment even a little bit.
And if we secure them by laying off workers, they may not be enough to make up for the lost jobs and wages, and consumer spending, they will create.