Taxes and Employment

>> 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).

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. "
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).

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 where it is now). The latter type of company is probably your best bet in a reliable job. But even 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
8500 10 41 10 8
34500 15 59 15 15
83600 25 81 28 25
174400 28 92 31 35
379150 33 94 40 45
500000 35 94 60 65
1000000 35 94 80 85
10000000 35 94 90 95

Taxes, using these rates are like this:

174400 Tax now Take home Tax 1944 Take home One option Take home Option two Take home
379150 110016.5 269133.5 334597 44553 124618 254532 140772.5 238377.5
500000 152314 347686 448196 51804 197128 302872 219325 280675
1000000 327314 672686 918196 81804 597128 402872 644325 355675
10000000 3477314 6522686 9378196 621804 8697128 1302872 9194325 805675
Total tax 4066959

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.


  • Roy

    Good post! I always laugh at those commercials from "average citizens" (as if they're not really reading a script and being paid for their work) criticizing increased taxes on the oil industry, and saying it'll result in less jobs. Right, if you tax the companies the oil will stop flowing and they won't need as many people. Why is it that the corporate world needs to resort to lies to justify their existence?

  • Project Savior

    Great post. The only other thing that you may have left out to keep it simple is that $1k the employer spends doesn't disappear it turns into business equity that they can use later for things like, Major Medical Expenses, Children's education, and those types of short term expenses that are tax deductible.
    So with the higher tax rate there is even more incentive to hire.

  • Relax Max

    It is obvious you have put a lot of effort into these 2 posts. I am certain you believe the analysis or your research points to the conclusions you have drawn and expressed here. I respect your right to theorize and to believe your theories. I also respect you for caring.

    It does detract from your debate, for me, at least, when you (or people on the other side any debate) feel it is rational or helpful to call people who don't believe what you believe "stupid" "nonsensical" "obviously stupid" and "idiotic people." Your presentation turned me off, frankly. Not your facts.

    I am a person who loves debate - often just for the fun of debate - but I have never liked name-calling during debates. I deplore it in myself and feel I have failed when I look back and see where it has happened in my own arguments.

    As an American, I feel there is entirely too much division between fellow Americans today, on both sides of all issues. It can sink us if it continues. It is perhaps already too late. I love debate, but I seek persuasion by simple reason, and don't believe that ridicule and marginalization of people who believe a bit differently than myself, should ever be found in my debating toolbox.

    I know you think you are correct on this issue. Thank you for your hard work in researching it.

  • Stephanie Barr

    Here's the problem, RM. We've confused the right to free speech with the requirement to give any statement, no matter how readily demonstrated incorrect, credence. That's how creationism is taught in schools as "science." That's how thousands of children are at higher risk from deadly disease because of demonstrably false accusations regarding vaccinations.

    When I say it is financially more advantageous to hire in a high tax environment, I'm not stating an opinion, but a readily demonstrated fact. And companies are there for profit. That some of the real financial growth occurred during the same decades as the highest tax rates is also fact. That one led to the other is a logical conclusion but opinion with evidence. Note the difference. You can say that high tax rates aren't the reason (or at least not the sole reason) for that economic growth mid century and you're not being stupid or a liar. To argue a FACT, however, unless you can provide equivalent evidence, however, is something different.

    To pretend that something that violates a readily demonstrated fact is anything but stupid and/or dishonest promotes more of the same. I won't do it. I won't pull punches on it any more than you do for criminals. This isn't a harmless myth like the tooth fairy.

    Belief in the BS that lower taxes promote job growth is a prime reason that the government isn't doing one of the main things it could do to counter unemployment - and it is the populace that's suffering the most that's promoting that position because they've been told falsehoods and no one's set them straight, statements in direct contrast to the facts.

    If people want to promote statements, opinion, that can neither be proved or disproved, more power to them. I'll disagree or agree based on my own reasoning. However, for people to promote obvious and readily disproved falsehoods to the damage of thousands if not millions of people, that I won't sit quietly back and do.

    As far as I'm concerned, if you've been given the evidence that demonstrates a fact and you still promote the falsehood, you're either a liar or an idiot.

    You want to argue the conclusions FROM the facts, no problem. Those are often gray. But there is no use, whatsoever, arguing with someone who refuses to acknowledge facts when demonstrated. They are immune to reason.

  • Relax Max

    I guess you thought my comment was about economics. Sorry.

  • Relax Max

    But, on your post, the cold hard fact is that since 2008 the USA has been mired in a Liquidity Trap. Or call it a Keynesian endpoint, if you choose. But the fact is, like it or not, when a country has entered a Keynesian endpoint (Liquidity Trap), no amount of throwing more government money into the system is going to matter, no matter where that government gets that money to throw away, printing press or taxes.

  • Stephanie Barr

    Calling "a fact" that a situation is a dead end based on the views of a *theorist* means you don't quite get the definition of fact.

    A fact is observable, repeatable data, usually readily represented by math where variables involved don't change the end result. I.e., I can can change the tax rates to play with it, but the basic demonstrable truth, that higher taxes lead to more incentive to hire if all else is equal, remains the same.

    Your statement is, in fact, not a fact, unless you can prove it to be true. Can you? If a govenrnment spends sufficient money on jobs, how can you say that doesn't help the economy? WWII, which you say stopped the original recession, was all based (gasp!) government jobs (through direct and contract jobs). Paid for, eventually, with mind-bogglingly high taxes. Even for the poor.

    The problem here is two fold: (a) without jobs, people don't buy, which reduces demand and leads to more unemployment as businesses crumble and (b) those with the kind of excess wealth who could employ many more people and perhaps reverse this trend have absolutely no incentive to impart with their absurdly high levels of wealth because of our kindler gentler tax regime.

  • Relax Max

    “Calling "a fact" that a situation is a dead end based on the views of a *theorist* means you don't quite get the definition of fact.”

    Making sure I have this straight:

    Theory of evolution = scientific
    Nobel Prize-winning economists using Keynesian theory of macroeconomics = silly and unscientific


  • Relax Max

    “Calling "a fact" that a situation is a dead end based on the views of a *theorist* means you don't quite get the definition of fact.”

    I didn’t ever say our situation was a “dead end.” I said we were in a Liquidity Trap (by definition) which some people have called a “Keynesian endpoint.”

    World-recognized macroeconomists (such as the uberliberal Paul Kruger of the NY Times) have stated this same thing. And called it the same thing.

  • Relax Max

    “I.e., I can can change the tax rates to play with it, but the basic demonstrable truth, that higher taxes lead to more incentive to hire if all else is equal, remains the same.”

    Then it is amazinging simple. Silly me. All we have to do is raise taxes, mail the money in to the government and let them hire people. For, you know, all those shovel-ready projects.

    [Didn’t you say once that if you keep doing the same thing over and over and expect a different result that you would be crazy?]

    And then... those newly hired folks will pay some of that government-paid wages back to the government in taxes, and we can hire three MORE people for 2 weeks or so.

    Then, next April, you tax the rich again (although they are not NEARLY as rich now) and we can pay the first batch again? What?

    The part I don’t get is that “higher taxes lead to more incentive to hire...” Why would you care about that, since it is the government and not private companies who create jobs? If private companies could create jobs, then you would just leave the tax money in their pocket to hire workers with. Obviously that is an ignorant thought, this not taking more taxes, so... Please clarify. No, we just need to raise taxes and send it in to the goverment. Let the government create the jobs. Let’s just keep it simple.

  • Relax Max

    “If a govenrnment spends sufficient money on jobs, how can you say that doesn't help the economy?”

    Can you define “sufficient?” Obviously more than a few trillion, right? I guess you must mean, “Until if starts working.”

    I wonder if you have any real idea how much money the “rich” in the U.S. actually have? (Not as much as you obviously think they have.) But it seems to me if you start taxing them at 100% we (our government, I mean) would create jobs a whole lot faster. Where am I going wrong here? Or does that not extend from your repeatable, scalable, factual equation? Is reality intruding on your theory yet?

    Here, I call to your attention that the government could just print out the money to pay these unemployed folks with. They are trying right now, but we could do a much better job of cranking out that money. Don’t need no stinkin’ tea party Republicans to raise THAT debt ceiling. Just pack it in the back door and start mailing out checks. Don’t you agree? I mean, tax is a tax is a tax, right? Just bypass those stupid unworthy idiots that don’t want to borrow any more money, right?

  • Relax Max

    “Paid for, eventually, with mind-bogglingly high taxes. Even for the poor.”

    I hate to break this to you, but not many people were making that $10,000 a year your MINIMUM charts show. Not in the 30’s, 40’s, 50’s, and much of the 60’s. $10,000 a year didn’t become common until the mid 1970’s, actually. As for the 91%, if you think there are loopholes for the rich NOW, boy, you should have seen it back then in the 1950’s! No, nobody was paying “mind-bogglingly high” income taxes back then to pay for “the war.” Shortly thereafter we already had two more wars to pay for anyway. There were just a lot of people working and paying some income taxes. Ever hear of Levitown after WWII? Oh, my god, that pesky private sector again!

    Go out and ask some old people.

    But if you do, be prepared to hear them also tell you that borrowing money is not the answer to prosperity.

  • Relax Max

    “The problem here is two fold: (a) without jobs, people don't buy, which reduces demand and leads to more unemployment as businesses crumble...”

    Why should we care about businesses crumbling? That’s insignificant. All we have to do is raise taxes and let the government create jobs. It’s simple. It works. Your charts show that it works. To speak of businesses crumbling as if that were a bad thing, is to imply that private businesses and the wealthy (horrors!) are an important source of job creation. Pshaw to that. Besides, businesses won’t crumble. People with all them cool government jobs with be buying goods and services.

  • Stephanie Barr

    I say what I mean. You don't get to decide what I meant to say.

    "Making sure I have this straight:

    Theory of evolution = scientific
    Nobel Prize-winning economists using Keynesian theory of macroeconomics = silly and unscientific"

    Said nothing of the kind. The theory of evolution IS a theory. The world is over several billion years old=fact. Living things adapt to their environment through natural selection (demonstrated in lab and in wild)=fact. DNA tracing=facts.

    Observable data=facts. Conjecture based on observable data does not equal fact. And there have been plenty of Nobel laureates associated with evolution and the study of genetics.

    As for my conclusions, I showed you, with data and math, how high taxes provide incentives to private industry to hire people. The jobs provided by government are icing. People who work, buy and sell, provide services, keep the economy working. No one working = no one buying = no economy.

    RM, I'm happy to debate, but address the FACTS and keep to the subject. You running wildly off and accusing me of making assertions I haven't made doesn't exactly make your side look good.

    You say the government can't make enough jobs, but it did in WWII. Obviously we couldn't maintain that level indefinitely, and it cost us - hence the tax rate. And, once people were working, the economy, jump-started, moved forward on its own.

    People with money in their pocket - what's their incentive to hire anyone? Goodness of their hearts? We've seen how well that worked. The rich have never been richer and no one's getting hired.

  • Stephanie Barr

    Per Wikipedia:

    A study by the World Institute for Development Economics Research at United Nations University reports that the richest 1% of adults alone owned 40% of global assets in the year 2000. The three richest people possess more financial assets than the lowest 48 nations, combined.[6] The combined wealth of the 10 million dollar millionaires grew to nearly $41 trillion in 2008.[7] In 2001, 46.4% of people in sub-Saharan Africa were living in extreme poverty.[8] Nearly half of all Indian children are undernourished, however even among the wealthiest fifth one third of children are malnourished.[9][10]

    A 2011 report by the Organisation for Economic Co-operation and Development (OECD) notes that, over the two decades prior to the onset of the global financial crisis, real disposable household incomes increased an average of 1.7% a year in its 34 member countries. However, the gap between rich and poor widened in most nations. The report's findings include: 1) Across OECD countries, the average income of the richest 10% of the population is nine times that of the poorest 10%. Additionally, with the exceptions of only France, Japan and Spain, wages of the 10% best-paid workers have risen relative to those of the 10% least-paid workers; and 2), the differential between the top and bottom 10% varies greatly from country to country: “While this ratio is much lower in the Nordic countries and in many continental European countries, it rises to around 14 to 1 in Israel, Turkey and the United States, to a high of 27 to 1 in Chile and Mexico.”[11]

  • Relax Max

    This is probably not going to be resolved on a blog. I think YOU are the one who is drifting far afield from the original premise of this debate and the original point of your blog post, not me. I'm not sure where Natural Selection (which I believe in because it is observably true) got inserted into a debate about how best to get out of our present economic difficulties, but I was trying to stay on topic about taxes and job creation. Suddenly you are talking about some United Nations study about rich oil sheiks and hunger in sub-saharan Africa (both of which I deplore) and I've lost you.

    To me, your post was about

    1. The high unemployment rate in the U.S. and how to address it
    2. Your personal hatred of the so-called teaparty and their beliefs

    Probably I should stop right here, because if I have misunderstood the very premise of your entire post, debating will go nowhere at all.

    So... ARE those the reasons you made these two posts?

    1. You feel you have an answer to how to create jobs
    2. To take this opportunity and forum to ridicule people who think it should be done differently than you think, and to call them stupid?

    If this is true, then I think you can certainly say "mission accomplished" with number two, and we can debate (if you can confine yourself to that) number one only.

    I'm losing interest and you may be too.

  • Stephanie Barr

    (a) Natural selection was point out as a fact so you could discern the difference between a theory and fact using your own example.

    (b) The examples from Wikipedia addressed YOUR comment on how much wealth the rich really had.

    My point of this post and the next one is to address the demonstrably false premise that lower taxes are an incentive to hire more people. Since almost all of your comments were railing on and on about government jobs (which wasn't the point of the post at all) argues you didn't read it very well.

    I'm fine with dropping the conversation unless you have hard data (i.e. facts) that address my main point. Theorists whose positions have contributed to our current condition (as Keynesian economics has), no matter how many awards they have, will not be regarded as facts unless they can be independently demonstrated as true AND address the point. The liquidity trap, for instance, did not.

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