Taxes and "job creators"...

[brewerpaul]

I hope someone can explain this to me. I'm obviously missing something pretty basic.

The Conservative position, if I understand it right, is that if you raise income taxes on the wealthy "job creators" (business owners), this will result in the loss of jobs or delay in the creation of new ones. However, aren't income taxes calculated on income once all legitimate business expenses are deducted? Wouldn't these legitimate business expenses include wages to employees? Why then would raising the income tax rate on a business owner's expenses after all deductions cause the loss of jobs.

I'm not trying to start a political argument here. I'd just like to understand this better.

[kkrell]

If the rate of tax makes it harder for the business owner's capital (or cash flow) to provide a return for a particular level of effort, then that money is going to instead be placed into another investment. That other investment might be real estate, bonds, foreign investment, jewelry, collectibles, etc., which may not provide the same amount of employment.

[I.D.10-t]

In general it seems businesses hire people, not rich people. Free from the bias of evidence, one could argue that re-investment through investment in one's own business or other's allows businesses to grow and hire people so indirectly more privately held money makes more jobs. One could also mean that disposable income means that people can purchase more, opening up job opportunities, but this is rarely the argument used. Personally I never understood why the same wasn't true for government (the receiver of taxes). Arguments of free market and which is more efficient and caters to the needs of the public aside, it seems that a wealthy government is just as likely to spend money on workers to build infrastructure. So would there really be a net increase?

It is one of those things that seems intuitively true, yet in practice often isn't.

[maki]

If anyone wants to educate themselves here are a couple of sites that advocate freemarkets;
http://mises.org/ Classical liberalism and the Austrian School of economics, now often called
'left libertarian'.
http://www.lewrockwell.com/ Much the same as the above.

[brewerpaul]

Free from the bias of evidence, one could argue that re-investment through investment in one's own business or other's allows businesses to grow and hire people so indirectly more privately held money makes more jobs.

But re-investment in the business eg buying more equipment, new facilities, would be deductible business expenses and not taxed as personal income, no?

[I.D.10-t]

Kind of circular at a point*, but the starter money could come from personal income, which won't happen if it is already "spent".

*Like paying income tax while employed by the federal government. Imagine how much our government could "save" if it decided its employees didn't need to pay income tax.

[BillChin]

The way the question is asked, it is politically loaded and shows bias by the framing. That said, I hope to give an example that illustrates the point without going into politics.

The first response gets at the crux of it. By raising marginal tax rates there is less incentive for people and businesses at the margin to hire the next person, or to invest in new plant and equipment. Lets construct an extreme hypothetical for illustration purposes. In this example, say taxes are at a straight 10% for everyone, all income levels. A coffee shop owner with five employees is thinking of opening a second coffee shop and hiring another five employees. 90% of any future net profits will go to the coffee shop owner that expands. Now say in this extreme world, there is a 10% tax on the profits on the first coffee shop, and a 50% tax on any profits from a second shop. This is obviously not anyone's proposal, but I am making it extreme just to make it clear. In this hypothetical, a 10% tax rate on the 1st shop, a 50% tax rate on any income from a second shop will make the business owner think long and hard about the choice. "Do I really want to bust my butt, work extremely long hours, have all the added aggravation, take all that risk, and then have half of any additional net profit go to taxes?"

At the margin, I hope it would be clear in this non-realistic hypothetical that if there were 100 coffee shop owners with the choice of expanding, a lot fewer are going to do it with a 50% marginal tax on their additional profits, than if there is a 10% tax. Change the hypothetical numbers from 10% and 50%, to something like 25% and 35% and there will be fewer that get discouraged, but it will not be zero.

As an aside, economic literacy is perhaps at an all time low and one reason debts and deficits are so high, both on a personal and national level. Here are some beginner resources:
http://www.khanacademy.org/finance-econ ... oeconomics
http://www.khanacademy.org/finance-econ ... oeconomics

and for those that already have a solid base in college level economics 101 that want to dive deeper:
http://oyc.yale.edu/economics/econ-252-11

[mutepointe]

To add to Bill Chin's comment, I heard on the radio this morning that back in the day when President Ronald Reagen was a movie star, the tax rate above $250,000 was 94%. So, once he made that much money, he quit working and went home to his ranch for the year. The movie studio execs would come to the ranch and try to convince him to work and he would reply, why should he work his butt off for 6% of what he earned. The movie would have to wait until next year. This put all the movie work hands out of work for the year.

But then I thought to myself, without calling in the radio program, wouldn't another B movie star just get the part? Just like if a coffee shop owner found it not profit effective to expand, that business owner wouldn't expand. Another local Mom & Pop business could start up that doesn't have the profit problem. It's a win-win, just as long as no one needs to be a bazillionaire. President Ronald Reagen seemed to be living a comfortable life at the ranch at $250,000 per year if he could return to the ranch and still manage to become President.

[BillChin]

To add to Bill Chin's comment, I heard on the radio this morning that back in the day when President Ronald Reagen was a movie star, the tax rate above $250,000 was 94%. So, once he made that much money, he quit working and went home to his ranch for the year. The movie studio execs would come to the ranch and try to convince him to work and he would reply, why should he work his butt off for 6% of what he earned. The movie would have to wait until next year. This put all the movie work hands out of work for the year.

But then I thought to myself, without calling in the radio program, wouldn't another B movie star just get the part? Just like if a coffee shop owner found it not profit effective to expand, that business owner wouldn't expand. Another local Mom & Pop business could start up that doesn't have the profit problem. It's a win-win, just as long as no one needs to be a bazillionaire. President Ronald Reagen seemed to be living a comfortable life at the ranch at $250,000 per year if he could return to the ranch and still manage to become President.

Another star might get the part, might not. If every star at a certain level is discouraged by the high marginal tax rates, odds are decent, that the film will not get made at all. To think that all movie stars are equal or equivalent seems beyond foolish. There is a reason Tom Hanks or Julia Roberts or any other big star gets more money, and more choices than a new actor fresh out of school. Most of the new people would love just to get any union scale job on any project, to build their resume.

Back to my coffee shop example, at the margins, some will go ahead and open the second shop, some will decide against. To think that someone will appear and open up that second coffee shop, when they have no expertise in running a coffee shop is questionable. Surely someone who has operated a successful coffee shop is much more likely to do it, and to succeed at it, because they know what is involved, vs. a new person.

What happens in corrupt cultures can be unfortunate. The high marginal taxes have discouraged most of those with the talent in the coffee shop running business from expanding, so the government decides that it needs to step in. In these cases it is often a crony with friends in government that gets a loan or a subsidy to open that second coffee shop and is horrible at it. In the worst cases, they may use it as a looting mechanism. The owner spends their time fishing, while government money pours into the pit. Instead of five employees, perhaps 25 or 50 mostly no-show and/or totally inept employees are given political appointments and a guaranteed wage no matter how the political coffee shop does. In this bad case, the main talents of the shop owner are cronyism and political connection, not running a coffee shop. This second political coffee shop culture can become a huge drain on the economy. Politicians keep funneling money into the culture of corruption because it furthers their political cause, even though it loses money, even though in the worst cases, it is being used as a mechanism to loot the taxpayers.

[chas]

Something occurred to me the other day. The stimulus was, IIRC, a majority tax cuts. And the side that favors tax cuts calls it a failure and the side that is against tax cuts calls it a success.

[BillChin]

Something occurred to me the other day. The stimulus was, IIRC, a majority tax cuts. And the side that favors tax cuts calls it a failure and the side that is against tax cuts calls it a success.

We are going down the political rabbit hole. Many on the other side believe much of the stimulus was mostly payoffs to cronies and politically connected groups, many of which contributed heavily to the election campaign. Mr. or Mrs. Crony contributes $10 million to the election campaign, and when the emergency stimulus is being written, Mr. or Mrs. Crony gets $100 million or $1 billion back in political payoffs. Nice work if you can get it, and don't care about looting the taxpayers. Again, that might be a cynical view of the stimulus. Perhaps the thread needs to be locked, because of the political nature and tone that the thread is likely to take if discussion continues.

[Nanohedron]

This thread is going down the political rabbit hole. I can't help but think that the entirety of the OP could have been couched without any political preamble, and the position I'm in as a mod has been made a difficult one for it.

I would love to see how on-point, in keeping with C&F principles, you all can keep this.

[maki]

Trying.....................to...........................restrain........................................myself.

[rhulsey]

Choosing to lurk on this one, I am.

[Nanohedron]

Choosing to lurk on this one, I am.

...he said as he hit "Submit".