Taxes and Employment

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 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
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		11079185		9616002		10198748

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.

Read more...

No tea for me, thank you. Here's why, part one. The truth about taxes

You know, it's been a while since I did anything even vaguely political.

See, for a couple of years now, I've been hearing one of the all time stupidest, most nonsensical political cries ever. For the most part, I've ignored it, not even dignifying it with an argument because, hey, isn't it obviously stupid? And the people screaming it stridently were, far and away, some of the most idiotic people ever seen on camera who weren't headed off to rehab at that precise moment. Today, of course, we'd call them potential candidates.

When stupid people scream something, over and over, on the premise that the VOLUME of your message denotes its veracity, it's a waste of time to argue it. Logical is clearly not part of the equation.

However, recently, I've been seeing more and more of the same idiocy coming from people I normally consider intelligent (if occasionally misguided). And that's not good. If otherwise intelligent people are going to be swayed by the VOLUME=truth legions of dullards, at least on concepts that can be readily disproved with a tax table, a bit of history and a spreadsheet, either (a) they're only pretending to be intelligent or (b) they never really gave it a bit of thought. And this is important and deserves a bit of thought.

So, I'm going to address the ridiculous mantra: "Smaller government! Lower Taxes! Why haven't you fixed the job crisis!"

Here's the quick and dirty answer: because the first two preclude the third. You can either have government taking a hand in reducing unemployment or you can have a small government and lower taxes. Not both.

Why? Because government can only reduce unemployment two ways: by providing jobs directly and indirectly by spending money or by changing the environment in ways conducive to encourage those with money to provide jobs. To deal with the "Great Depression" the government did both, too slowly at first, because it seemed counterintuitive, but they did both and it worked. I'll explain why.

Actually, I don't have to explain the first part. FDR rolled out a huge number of projects, building roads, dams, schools, bridges, you name it, anything to give people a paycheck, a way for self-respecting folks to put food on the table. It hurts a self-respecting person not to be able to earn a living wage and the longer it goes on, the worse it gets. As a side benefit, we got a great system of highways, clean energy sources (dams) a great deal of other wonderful infrastructure that is finally starting to fall in around us. But I digress.

Now, there are those that have argued that federal jobs didn't get us out of the depression, that the fed government couldn't have put enough people to work to change things. Rather than federal jobs, WWII got us out of the depression. Admittedly, that had a huge impact, but before you sit smugly back having pulled one over on the Rocket Scientist, ask yourself one question: all that economic growth from labor shortages with men as soldiers overseas and all the need for tanks and ships and planes - who paid for that? Who bought the ships and planes and tanks? Who paid the men overseas wages to send home? That's right, the federal government. Still a jobs program, just on a whole different scale. The depression was broken with jobs from the federal government so it can be done (without requiring that level of government expenditure indefinitely). 'Cause it has.

But let's say that makes us a little scared. So scared, in fact, of debt that we cut government spending because we don't want more debt. Well, shit, it's no surprise that if you cut government funding, you'll lose jobs. People don't realize that there are teachers at every school because of federal funds, that we have more cops and more firemen and better roads and cleaner water and air because of federal funds and the salaries they pay. A huge portion of those cuts everyone's so eager for are jobs people desperately need, either jobs that won't come to be or jobs we now have that we won't. Might want to give that some thought.

But what can we do? We can't just build up debt impossibly! We've started two wars, and, rather than solve our problems, they've added to our debt but not our employment! What are we doing wrong?

I'm glad you asked. I'll give you a hint (how they did it during WWI and WWII). And, next post, I'll explain why the notion that lowering taxes increases employment is so inherently flawed and demonstrably wrong. With real math!

First fifty years of Federal Income Tax Brackets from Wikipedia who cites their source (in case you're afraid it's all lies).

Year	$10,001	$20,001	$60,001	$100,001	$250,001	$500,001	$1,000,000
1913	1%	2%	3%	5%	6%	7%	7%
1914	1%	2%	3%	5%	6%	7%	7%
1916	2%	3%	5%	7%	10%	12%	13%
1918	16%	21%	41%	64%	72%	76%	77%
1920	12%	17%	37%	60%	68%	72%	73%
1922	10%	16%	36%	56%	58%	58%	58%
1924	7%	11%	27%	43%	44%	46%	46%
1926	6%	10%	21%	25%	25%	25%	25%
1928	6%	10%	21%	25%	25%	25%	25%
1930	6%	10%	21%	25%	25%	25%	25%
1932	10%	16%	36%	56%	58%	61%	63%
1934	11%	19%	37%	56%	58%	61%	63%
1936	11%	19%	39%	62%	68%	79%	79%
1938	11%	19%	39%	62%	68%	79%	79%
1940	14%	28%	51%	62%	68%	79%	79%
1942	38%	55%	75%	85%	88%	88%	88%
1944	41%	59%	81%	92%	94%	94%	94%
1946	38%	56%	78%	89%	91%	91%	91%
1948	38%	56%	78%	89%	91%	91%	91%
1950	38%	56%	78%	89%	91%	91%	91%
1952	42%	62%	80%	90%	92%	92%	92%
1954	38%	56%	78%	89%	91%	91%	91%
1956	26%	38%	62%	75%	89%	91%	91%
1958	26%	38%	62%	75%	89%	91%	91%
1960	26%	38%	62%	75%	89%	91%	91%
1962	26%	38%	62%	75%	89%	91%	91%
1964	23%	34%	56%	66%	76%	77%	77%

I want you to notice what the US used to do when they had wars to fund: yeah, they expected us to help pay for them. Even during (and after) WWII, the lowest brackets were paying higher taxes than our highest brackets today. Which is how they addressed the deficit problem as they put people back to work.

One more thing to notice. Higher tax brackets had a serious drop in percentage early on. Anyone else notice where? That's right, just before the Great Depression. Tomorrow, I'm going to show you why that might not just be a coincidence. Sharpen those pencils!

Read more...