Economics Online Tutor

Taxing the 'Job Creators':
What Is the Truth?
Raising taxes on the wealthiest Americans, or on corporate America.  This is a very important subject today.  With elections coming
up very soon, candidates everywhere are campaigning on the subject.  "If you raise taxes on job creators, it will destroy the
economy".  At the same time, they demonize the opposition and anybody who dares suggest raising taxes on the richest 1%, or
10%, or whatever.  Even raising revenue for the government by closing tax loopholes for the wealthiest is considered heresy - it is
"raising taxes on job creators".  Candidates for president are saying this.  Candidates for Congress are saying this.  Many have
taken a pledge not to raise taxes.  Never mind that such a pledge is
unconstitutional.  What are the merits of such a claim?  
Would raising taxes on the rich cost jobs, because that is what happens when you tax 'job creators'?
The first question to ask is this: are the rich really job creators?  For the sake of argument, let's just
assume for now that they are.  So will raising taxes on these job creators really kill jobs?

Think of the process of how this all works.  Instead of relying on some vague theory, or political rhetoric,
think through the actual process.  For any given tax rate, people can use their BEFORE-TAX income on
something that can be written off on their tax return, thus reducing their taxes, or they can use this
income on something that WON'T reduce their taxes.  In that case, they will be paying taxes at the marginal
rate on that income.  If they hire workers, and therefore "create jobs", then the benefits that they pay out
to workers becomes a business expense.  They won't pay taxes on this money because it is deducted from
revenue before computing taxable income.  If they decide not to hire workers, and keep the money as
profits, then they WILL have to pay taxes on this money.  Unless they find somewhere else to invest the
money, an investment in something that does NOT create jobs, they will have to pay taxes on this money.  
But if they hire workers with the money, then they won't have to pay taxes on it.  That is how the tax code
works.  Hire workers, pay fewer taxes.  Don't hire workers, and either pay more taxes or invest in
something other than job creation.  
To repeat: for any given tax rate, hire workers, pay fewer taxes.  Don't
hire workers, and either pay more taxes or invest in something that doesn't create jobs.

That is what happens for any given tax rate.  What happens when the tax rate changes, such as with
proposals being put forth in Congress?

If you increase the tax rates on these job creators, then the tax that they pay on everything EXCEPT jobs
will go up.  They still won't have to pay taxes on the money that they spend for employee compensation.  A
tax increase will give them an incentive to invest in the business, because it is the cost of NOT investing
that goes up, not the cost of investing.  It won't give them an incentive NOT to invest in job creation.  This
will not be an incentive for killing jobs - this will be an incentive for creating jobs - take money out of the
column that is taxable, put it in the column that is not taxable.  Simple mathematics.  Not political rhetoric,
but mathematics.

If you decrease the tax rates on these job creators, then there will be no added incentive to create jobs.  
The taxes paid on employee benefits for these job creators is zero either way.  What this does is decrease
the taxes that they have to pay on the money that they aren't using to create jobs anyway.  The cost of
paying for jobs does not go up, but the cost of NOT creating jobs goes down.  It is an incentive for them to
keep more profits that are taxable.  It is in no way an incentive for them to spend the money on job
creation.  Again, mathematics, not rhetoric.

If you don't understand the previous four paragraphs, please re-read them, because this is important to our
economy today.
 It explains to a large degree how we have been spending so much time struggling through
a "jobless recovery" even as large corporations are reporting record cash levels.  These corporations
already have more cash than they are investing back into their businesses.  Interest rates for them to
finance job creation through borrowing are at historical lows, near zero.  Yet they aren't investing this
money on jobs.  With this amount of cash and job-creating ability already, why do we have so many
unemployed people?  The political rhetoric is that if they get even more money, on top of their record cash
reserves, in the form of lower taxes, they will create jobs, and that the millions of unemployed Americans
are all lazy anyway.  Or that somehow, these workers aren't qualified to take back the jobs that they were
laid off from.

That is the political rhetoric.  The reality is something different entirely.  
The reality is that: (1) raising taxes
on the rich doesn't kill jobs, and lowering taxes on the rich doesn't create jobs, as explained above; and (2) the
rich are not the real job creators, as explained below.
For the above explanation about taxes, I left in the assumption that the rich are the ones that create jobs,
so that the focus can be on the effects of the tax rates for the richest Americans.  But the truth is that
consumers are the ones that create jobs.  Tax rates for the rich have nothing to do with it.  If a business of
any size sees a way to increase before-tax profits, it would be to their advantage to do so.  They want to
keep their tax bills at a minimum, of course, but
raising before-tax profits will also raise after-tax profits.  Very
little money for rich individuals, and ABSOLUTELY NONE for corporations, will be caught up in the margin
where the additional before-tax profits will be lower than the additional taxes.  If any business
decision-makers worry about the taxes more than the actual effects on the bottom line, then they aren't
making wise decisions.  Increasing before-tax profits for all practical purposes is the same thing as
increasing after-tax profits.

If a business or a potential business sees a demand for their products and/or services that will generate a
profit, they will do what they can to get that profit.  If it means hiring more workers in order to meet that
demand, and the cost of additional workers is lower than the addition to potential profits, then they will
hire more workers.  The tax rate on the business has nothing to do with it.  What is needed to make it all
happen is consumer demand.  The people who will do the buying in the economy are the ones who need
the buying power to make it all happen.  It is a consumer-driven economy.  More income for the middle
class, for the working poor and even for the non-workers will create demand.  Consumer income and
consumer confidence in the economy create jobs.

I mentioned consumer confidence.  What about business confidence?  Business confidence starts with
consumer demand.  If the masses in the population aren't buying, then there won't be any business
confidence.  Businesses prefer stable government policies for sure, but most of them won't tell you that
stable higher taxes will create more business confidence, in terms of creating jobs, than stable lower
taxes.  But that is the truth.  Eliminating loopholes will create more stability than anything, because it levels
the playing field.  Businesses will quit scrambling around, paying expensive tax lawyers and accountants,
looking for loopholes if the loopholes no longer exist.

So, you don't want to raise taxes on 'job creators'?  Then quit demanding that the poor pay more taxes.  
Quit backing policies that have been destroying the middle class for the past 30 years.  Prior to 1981,
incomes for all classes rose together as the economy grew.  The upper classes got more than the lower
classes, but all gained at equivalent rates.  Since then, the top 10% have received more than the rest.  
Even the gains of the top 10% have paled in comparisons to the gains of the top 1%.  Those are economic
facts that are readily available to anybody who cares to fact-check any of this.  All of this is the result of
changes in economic policies in Washington.  These policies have created a situation where income that
would have been distributed evenly based on policies that were in effect throughout the 1950s all the way
through 1980 is now all going directly to the top.  Wealth has been redistributed.  But not from rich to poor,
like the political rhetoric says.  Wealth never gets redistributed from rich to poor in the United States
today.  It always gets redistributed from poor to rich.  Another economic fact that you can verify if you
choose to.

How does this affect the overall economy?  What I am talking about has nothing to do with a sense of
"fairness" or "equality" or anything like that.  I am talking about the overall economy.  Here is how the
economy works in a nutshell:

The economy is comprised of people who buy, and people who sell.   When enough goods and services
get bought and sold, then the economy thrives.  When enough goods and services don't get bought and
sold, then the economy goes into a recession.  
The basic economy is the buyer and seller relationship.  
When things are going well, then this relationship is going well.  When things are not going well, then this
relationship is not going well.  It's as simple as that.  There are other things that influence the economy in
very big ways.  These are all familiar actors in the economy: the government, the banks, the import/export
market, the Federal Reserve, even the weather.  These are all things that influence the economy for better
or worse.  But their influence, good or bad, only matters to the extent that they affect the buyer / seller
relationship.  When you have 30 years of policies that are designed to benefit only one side of this
relationship, then the economy gets out of whack.  You can't have a full recovery from a deep recession
without restoring the balance between buyer and seller.  Free market economics,  capitalism, is based on
free transactions in which both sides to every transaction are equal.  Continuously giving more to one side
at the expense of the other side does not promote free markets, it destroys them.  I don't care what the
rhetoric says.  Free markets need both sides of all transactions to have economic power.  But, you may
say, the rich spend their money just like the poor and middle class do.  Wrong!  If they did, they would all
be paying the maximum tax rate on all of their income.  But they don't even come close.  Instead of
spending their money on consumer goods that everybody else does, they put much of it in tax shelters.  
Tax shelters that mostly do not create jobs.  The poor and middle-class, on the other hand, spend most of
their incomes on goods and services that the economy produces.  In economics terms, this is called the
marginal propensity to consume.  The poor have a very high one, the rich have a very low one.

Which brings up another hot issue that is driven by rhetoric: why raise taxes on the rich when they already
pay most of the taxes?  Well, they pay most of the income taxes, but not most of the other taxes.  The other
taxes are mostly regressive.  The income tax used to be very progressive to balance this out.  But policies
of the past 30 years have taken away much of the balance.  The rich end up paying more income taxes
because the policies have given them a much larger share of the income, and put more people under the
taxable limit for income.  Higher taxes on the rich didn't create a situation where the rich pay more income
taxes - lower taxes on the rich did.  The share of total taxes paid by the rich may have gone up due to the
rich having a much higher share of the total income, but the share of their income that is taken away in
taxes has gone way down, to historically low levels.  Policies in Washington have created this situation.  
Taking away money from those who earn it in order to give it to those who don't earn it?  That has already
been done.  The working class has had their wealth confiscated and given to the very rich.  The wages
paid to workers used to go up when their productivity went up.  The economy thrived when that happened.
But for the past 30 years, workers' wages have not gone up while the workers' productivity has skyrocketed.  
This is not some liberal rhetoric.  This is not some liberal theory.  This is economic fact.
I have gathered together the "big picture" numbers for the past 98 years.  Click here to see them.  These
numbers have not been hand-picked, or manipulated in any way, in order to agree with any particular
position.  They are the real numbers of the performance and policies of the United States economy.  Go
ahead and study them.  98 years of data is enough to show any trends, any results of any policies.  These
numbers validate the points that I have made here.  I have not been writing from a predetermined point of
view.  I came to my own conclusions only AFTER examining all of the available information.  The reason why
I didn't go back more than 98 years is that the data prior to that time is not available.  What is available for
the earlier years is information about recessions and depressions.  They occurred much more often, were
felt more deeply throughout the economy, and lasted much longer than at any time between the Great
Depression and now, when the wealth gap has grown to the largest that it has been since the 1920s, just
prior to the Great Depression.  This increase in the wealth gap should concern us all.  It could very well be
a leading indicator for an economic depression.

The question now should be: what is more important to you, making important decisions based on the
truth, or ignoring certain truths so that you can stick to a predisposed political position?  Myself, I choose
the truth because I care about the future of my country.