>> Monday, October 3, 2011
I started the discussion here, in case you missed it. Now, today, I've challenged myself to demonstrate that higher taxes are incentive to hiring employees, at least more of one that lower taxes. Fortunately, a commenter on the last post gave me a great segway:
"In fact, unless that new person makes more money for me than they cost me, I'm not hiring. If the person does make me money, then I'll hire (means more profit).In private industry, when it comes to hiring, it's all about making a profit. I'm not talking about government jobs, here, or contract labor where every body you hire you can charge (with a premium) to the government (because that's always profit even if they contribute nothing). That's a whole other discussion (though government cuts still impact those employee numbers).
The fact that my net profit (after paying wages and other expenses) might be taxed greater, or less, has NOTHING to do with whether there is increased/decreased demand for what I'm peddling. "
No, in the real world of business, you hire someone when hiring them serves your interests, either allows your business to grow, provides you a skill you need to perform your business, or otherwise allows for more and/or better business. If hiring someone doesn't do that for you, most companies won't do it because that would be stupid. Whatever increased growth or business they expect from your hiring is likely to be more than they're paying you...or you won't be working very long. Companies are in the business of making money. Some are preoccupied with short term profit (which is where many a big layoff comes from) and some are focused on growth, even if short term profit suffers (a philosophy that's put Amazon.com where it is now). The latter type of company is probably your best bet in a reliable job. But even Amazon.com wants every hiree to contribute to their bottom line, the size of the company and the business it generates.
What that means is what an employee costs < what an employee generates at least in the long run (I've already said this but I'm moving toward math so bear with me). Now, for a small business owner, it's relatively simple. Their profit tends to be ~ of an individual or family's income might be - if it's much more, they might be jumping in to hire to expand it. If it's much more, they'll be cutting where they can to make a decent living. If possible. And that could mean employees. But a tax rate (~ a year's salary) are unlikely to be a deciding factor. If I'm making 167,000 in profit, whether I pay 47,000 or 42,500 in taxes is unlikely to be why I choose to do so. If I want to take home less and build my company, I'll do it. If I don't, I'll suck it in and pay the taxes.
But when we're talking lots of money, 500,000, a million, or more, it makes a difference. Let me show you. First, let's take four tax rates: current, 1944, and two other speculative rates that are somewhere in between:
|Brackets||Current||1944||Trial 1||Trial 2|
Taxes, using these rates are like this:
|174400||Tax now||Take home||Tax 1944||Take home||One option||Take home||Option two||Take home|
|Total tax||4066959||11079185||9616002|| |
One important thing to note, taxes aren't a straight percentage: as you'll note, the guy making 10 mill isn't stumbling home, weeping, with a measly half mill, even at a 95% tax rate because each portion of pay up until the higher brackets is taxed at that bracket's rate. Only the excessive amounts (not the base levels) get the higher tax rates. (So, no, you won't make less than the poor shmoes at the 35% tax rate - that's a myth).
But, let's say, you're considering hiring some people. Now, when you hire someone, that income you're paying out (+overhead) is pulled off your profit; therefore, the net cost to hire someone is effectively the actual cost-tax savings. For example, say it's 1944 and you're in the any of the tax brackets above 500,000 (94%), you hire someone for $20,000 (salary + benefits), but, because your tax bracket's so high, it saves you $20k x 94% or $18,800. So, for a net difference in take-home of $1200 you can hire someone worth $20k, build up your company, get that skill, grow the company. You're still short that $20k, but you're paying so much less in taxes it's almost a wash. And someone has a job.
Here's the tax savings for hiring someone ($20k) at:
Today's highest tax rates: $7K - net cost $13k
Speculated middle 60%: $12k - net cost $8k
Speculated high 80%: $16k - net cost $4k
Speculated high 90%: $18k - net cost $2k
Speculated highest 05%: $19k - net cost $1k
So, a company/individual making a profit considering hiring someone can get the same employee costing a net of $13k in quick profit or $1k, but, in both cases, building his business. Which one has the incentive to hire? If you have more than seven brain cells, the answer is obvious.
And if you think it's the guy with the low tax rate, here's your pointy hat and there's your corner.
And here's the other good news: a substantial part of those extra taxes drained away go to jobs, too.
Next time: capital gains tax rates and why they're killing employment rates.