The Law of Diminishing Returns – or Why Tax Cuts for Wealthy Corporations Won’t Create Jobs

It seems to me that even the economists, who should have been all over this, have missed the boat about tax cuts for the wealthy and for wealthy corporations will not create more jobs.  They have also missed why tax increases on them will not cost jobs.  It is the Law of Diminishing Returns.

 

While normally applied to factors of production, the law of diminishing returns extends to any goods or services, or anything one has acquired in life.  Its definition is:

A classic economic concept that states that as more investment in an area is made, overall return on that investment increases at a declining rate, assuming that all variables remain fixed. To continue to make an investment after a certain point (which varies from context to context) is to receive a decreasing return on that input.

What does that have to do with taxes on corporations an the wealthy and its relationship to jobs?  Here are a few illustrations.Illustration 1:  When somebody is really hungry and has no food in the house, if he gets $10.00, he will go out and spend it all on food.  After he has eaten, if he gets another $10.00, he is not as hungry, so he may only spend half of it on food.  After that, getting another 10 spot may only cause him to spend $2.00 on food, and once he is full, he won’t spend any more of it on food.   This is the law of diminishing returns.  The first meal is a necessity, the second is a luxury, soon you need no more and trying to eat more stops being a good, it becomes a bad.  You may get so stuffed that the sight of food is unappealing.  Or think of zucchini.  If your plant yields two zucchini, you may eat them.  If it gives you 10, you may eat 8 and give two away.  After 25, you may pay people to take them.

Illustration 2:  Think of employees.  If you have work for twice as many people as you have and can sell as much product as twice as many employees can produce, if you get some increased income or decreased expenditure, you will hire more employees.  You will do so as long as the next person hired produces more than he costs.  However, as soon as you have enough employees to meet demand, you stop hiring.  In fact, if you hire more, they will get in each other’s way and will not benefit the company.

The wealthy and the corporations currently have their needs met, and most of their wants.  They really don’t have anything compelling to spend money on.  You could decrease their taxes to zero (and have in many cases), and they won’t buy more nor will they hire more.  The money will sit around, lacking anything to spend it on.  This is especially true for corporations in today’s economy.  With people too strapped for cash to be spending freely, demand is suppressed.  Making more product will not produce a return because nobody will buy it.  It stops being a good and starts being a bad because you have spend money to store the excess.  No well run corporation will do that.

However, if you were to tax the wealthy and the corporations, you could use that money on projects the country needs (think bridges, airports, schools).  That would create jobs.  At first, the new jobholders would spend on clearing debt and the necessities they have been without.  That is a good thing, it gets money circulating again.  Then they can start buying other things.  That would stimulate demand.  More demand would mean more products would be sold.  More sold products means more profits for the corporations, but this time there would be a need for more employees.  Who would allow the corporations to make more profits.

It is amazing that the corporations would fight the idea of ensuring people were employed so they could buy their goods.  It is what the Marshall plan after WWII was all about – ensuring Europeans had income so they could buy American goods and services.  It was what the labor movement has always been about – ensuring healthy laborers had income and time to enjoy it so the economy could thrive. (This also benefits employers because healthy, fed and happy employees are more productive.)

When the Republicans talk about how tax cuts for the rich creates jobs, we need to remind them of the most basic of Economic tautologies, the Law of Diminishing Returns.

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One thought on “The Law of Diminishing Returns – or Why Tax Cuts for Wealthy Corporations Won’t Create Jobs

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