(Ed Note: we continue to host guest editorials from time to time. This month’s guest op-ed is from Max Holland. “Max, aka Birdpilot, is a retired former business owner who also spent a number of years in the corporate and academic arenas. He is a pilot and sailor, who has been active in politics since the Goldwater-Johnson election in 1964. Having been born in South Carolina and lived a number of years in California, he now is a Texan by choice.”)
by Max Holland
How many times have we heard the primary justification by the Republican Party of extending the Bush tax breaks for the rich being the reason for ‘job creation’? Because the “uncertainty of tax policy” makes those earning over $250k per year; only a fraction of which are actually small business owners, reluctant to add employees?
Let’s see now: American companies are holding on to something between 2 and 3 trillion dollars in cash and a couple percent change in the marginal tax rate keeps them from adding jobs? Or is this more of the old, outdated, and disproven ‘supply side theory’ that the same group of geniuses, excluding Reagan budget director David Stockman, have hoodwinked us with for 30 years now? Does demand not have more to do with job creation than this Republican talking point?
I have operated three companies over the years and never have I considered the marginal tax rate of my (potential) income either at start-up or during the growth phase of the business. Nor have any of my friends who also own small businesses ever mentioned marginal tax rates as affecting their hiring decisions. All of us, myself included, have spoken of increased demand for our product as the impetus for hiring new employees. This is true during short term needs as well as spikes in orders. How can this be?
Well the easy answer is due to the simple fact that income for a proprietorship, partnership or other small business is only that revenue remaining after all business expenses are deducted. All business expenses, including labor costs, are paid out before the owner gets a dime! It begs the question, then, as to how marginal tax rates on income and the money that the owner gets to keep after paying all business expenses affects the decision to hire additional employees.
The hiring decision has always been based on the increase in units of production each new employee generates for the business. If I expect that my demand is to increase from 1000 units to 1200 units and each employee produces 200 units, I’ll add one additional employee. Conversely, if my demand goes from 1,000 units to 800 units, I’m going to have to lay off one employee. The marginal tax rate on my income, other than the possible decrease as I possibly try to maintain employee level constant before that lay off, has no bearing on my hiring decision. I cannot hire additional workers if the demand for my product does not increase above current levels. In fact, the government could reduce my effective tax rate to zero and, unless the demand for my product was rising, I still would not add additional workers.
Any other process of business decision making that does not have the demand for product as its principle basis and the amount of production each employee represents, is foolhardy at best. And I’ll bet an owner would get a significant amount of negative feedback from their accountant for attempting to do otherwise.
My concern is why haven’t Democratic political operatives used this argument, loudly and often, to counter the GOP talking point? Here’s my take on the new Democratic talking points in four sentences:
- Demand drives business.
- Workers are hired when business demand increases, not before.
- Owner income is only available after other business expenses are paid.
- Marginal tax rates on owner income does not affect hiring, only demand does.
Imagine if we heard this come out of the mouth of every Democratic politician, operative, consultant, etc; particularly on the same stage or debate as the GOP counterpart. Imagine if it were broadcast in every news program or on every opinion program.
It’s time to expose the Republican tax scam for the charade that it is.
- The Situation of High Marginal Income Tax Rates and Motivation (thesituationist.wordpress.com)
- the disincentives of (various) marginal tax rates (schansblog.blogspot.com)
- No country for Zuckerbergs (dailykos.com)