Lower Tax Rates = More Jobs?

May 29, 2011

I’ve been an employer for about 30 years. “But you’re an attorney,” you say. “Yes, of course I am, but I’ve always had a secretary, and the firms with which I have been affiliated have had associates, contract attorneys, legal assistants, bookkeepers, files clerks, etc.” So, directly and indirectly, I’ve been employing people for three decades.

My practice focuses on business and real estate issues. My clients are employers, large and small, in many, many different industries.  I’ve represented my clients in times good and bad, and often talk with them about employment issues.

My point? Never, not once, have I decided to hire someone because I–or my firm–had extra money lying around. And never, not once, has a client of mine told me he or she hired someone because they had some extra money in the bank.

We–people who hire employees–hire them when we have work for them and think we will earn more money on account of the work they do. No mystery here; it’s really that simple!

So I get a little nutty when I hear about the Republicans’ job creation scheme. Lower marginal tax rates for the highest earners, they claim, and small business owners will have more money and, thereafter, start hiring. Rubbish, and here’s why:

Assume I own a business. I have employees.  We generate gross revenue of $500,000, and I net $250,000 after paying all expenses. My income tax bill (federal) is about $45,000, leaving me with after-tax income of $205,000.

Now, assume all of the same facts, but change the highest marginal tax rate on my income from its current 33% to 25%. When the math is done, I’ll have an extra $10,000 in my pocket. Cool, but the extra money gives me no reason to hire someone else. After-tax income of $205,000 or $215,000 changes nothing about how I run my business, as we’re still focused on the sweet spot, where I am maximizing revenue and minimizing expenses.

I know, I know, if lots of people all have an extra $10,000, they’ll buy more stuff and maybe, just maybe, they’ll buy it from me. Then, I’ll need to hire more people because demand for what I sell will actually increase.

True, but what if I decide to save the $10,000, or use it to pay off debt? In fact, with an income of $250,000 there’s not much I need. Maybe I don’t appreciate the consumer culture–I, of course, don’t have a credit line of $500,000 at Tiffany, like a certain “regular guy” who’s running for President–but the notion that, somehow, high-earners who pay less to the government will spend their tax savings and cause employers to hire people is just as silly as the old supply-side canard that if we lower tax rates enough tax revenues will increase. There aren’t that many high-earners, and there’s only so much “stuff” we can buy.

If people want lower tax rates, fine. Let’s be honest, though, about two things:  First, lower rates means government collects less, which means government must borrow or do less. And, second, putting extra money in people’s pockets does not cause employers to hire more workers unless the extra money increases demand, which won’t likely happen if we focus on demand generated by our highest earners.

Note: The opinions offered here are mine, and mine alone, although they happen to be supported by the Congressional Budget Office and lots of other groups that know this stuff much better than I do.

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