Get used to low unemployment rates — thanks to the federal tax cuts

Author: Jeff Wasden - June 1, 2018 - Updated: June 1, 2018

Jeff Wasden

Friday’s jobs report from the Bureau of Labor Statistics shows the national unemployment rate is 3.8 percent, the lowest rate this century. Colorado’s is even better at 2.9 percent. Even the best forecasters couldn’t have predicted such a strong labor market six years ago when the unemployment rate was twice this level. Currently there are 6.6 million unfilled jobs across the nation, suggesting the unemployment rate could fall even further.

This strong labor market is largely a result of the current economic expansion. Economic growth in recent quarters has finally been near the 3 percent level this country is used to, following many years in the 2 percent range. Again, Colorado’s economic growth is even better —  at 3.6 percent last year. But solid economic growth alone can’t account for this historically low unemployment rate. For that, we should thank the recent Republican tax cuts, which have added fuel to the economic fire.

The tax cuts included a new 20 percent small-business tax deduction — the biggest small-business tax cut in the nation’s history. Like me, you probably know of several small businesses just barely hanging on in today’s competitive economy. This tax relief will allow them to protect one-fifth of their earnings from taxes. These saving can then be directed to the expansion, capital expenditures, and hiring they need to become more competitive and stay in business.

This deduction should also help address the historically low small-business startup rate. In contrast to nearly all other economic indicators, the startup rate has not recovered from the Great Recession. The new small-business tax cut will give potential entrepreneurs extra incentive to follow their dreams. Because these small firms account for two-thirds of all new jobs created, such a small business expansion will help the labor market even more.

No wonder small businesses support the tax cuts by a 10-to-1 margin, according to a recent survey conducted by the Job Creators Network.

The tax cuts also brought the nation’s corporate tax rate in line with international standards. This allows American businesses to better compete with their foreign counterparts, which ironically have often been in a better position to invest in the U.S. because their home governments tax away less of their earnings.

Instead of American companies “investing” abroad to try to better compete in today’s global marketplace, companies are now returning to — and expanding in — the U.S. because the tax climate is finally fair again. These include major employers such as Bayer, Amazon, Ford, and Broadcom.

In these conditions, it’s easy to see how the unemployment rate has fallen to a historic low. But it’s not only jobs that these businesses are providing with their tax cuts. They’re also delivering higher wages. Over 500 businesses, including some of the nation’s biggest employers such as Walmart (1.5 million U.S. employees) AT&T (200,000 employees) and Starbucks (250,000 employees), have directed part of their tax cut savings to increased employee compensation. As a result, median wages are growing at their fastest pace in a decade after many years of stagnating.

Congressional Democrats — led by Colorado Rep. Jared Polis — have promised to repeal these tax cuts if they retake power on Election Day this fall. They complain these are merely tax cuts for the rich. That is not true. The share of taxes paid by the rich actually increases under this law. Not only are ordinary Americans benefiting from reductions in their individual income tax, but they are also benefiting from the greater prosperity, more job opportunities, and higher wages spurred by tax cuts.

An unemployment rate below four percent may be an anomaly. But as long as the tax cuts remain in place, stimulating the economy, expect to see this far more frequently in the future.

Jeff Wasden

Jeff Wasden

Jeff Wasden is the president of the Colorado Business Roundtable.