Wednesday, October 3, 2012

For the Last Time: Lower Taxes Do Not Create Jobs!!!

After watching tonight's first presidential debate I A) need an aspirin, B) am reminded why I can't stand Jim Lehrer, and C) feel the need to clarify basic economic theory for the American people.

Throughout the debate--which focused on the economy--both Mitt Romney and Barack Obama drew correlations between business tax rates and unemployment. Romney, in particular, argued that higher tax rates on small businesses would force employers to lay workers off. (In keeping with the banal, childish rhetoric of these forums in which candidates speak in thought-terminating soundbites, he called such a policy a "job killer.")

This alleged correlation between taxes and unemployment is entirely false. There is no correlation between the two. Nada. Zero. Zilch. The idea that higher taxes will hurt employment or cause businesses to lay people off is a right-wing, free-market myth with absolutely no grounding in basic capitalist economics.

I wrote about this very issue back in June, but my everyday conversations suggest people still remain confused about the concept. Let me lay it out for you as simply as possible.

Let's say I own a small business. I sell comic-books. I have ten full-time employees. Suddenly, Maine Legislative Bill X, which raises the tax rates for all small businesses that employ ten staff members or more, becomes law. So the taxes on my comic-book shop will be going up.

Does this mean I will be forced to fire some of my employees in order to "cover" these higher taxes? No. It does not.

Here's why: First off, taxes have absolutely nothing to do with determining how many employees I need. That is determined by consumer demand. Now, here in Portland, comic-book shops are quite popular, so let's say I have very high demand. Thus, my needing ten full-time employees. This number ten was not some randomly determined number. It is based on the amount of business my store does.

Secondly, taxes are based on the amount of taxable income my business has after subtracting my costs from my revenue. Any profits I have made after covering my business's costs are considered "taxable income." And you only pay taxes if your business is making a profit in the first place. In other words, if my comic-book shop is dead most of the day and my employees are bored out of their minds throughout their shifts because there is nothing to do but read comics all day, then I as the store owner have far bigger concerns than my taxes.

And even if I did fire some people in order to "cover" my taxes, it would be completely counterproductive because doing so would lower my costs, thus increasing my profit and, as a result, my amount of taxable income.

The two things--business tax rates and unemployment--are not related. Anyone who believes otherwise needs to enroll in Economics 101.

Update: Portland resident and small business owner, Stretch Tuemmler, says the same thing in his letter to the editor in today's Portland Press Herald ("Ending tax cuts for the rich would aid small business," 10/05/2012). He writes, "As a small business owner, I hire when the demand is there. Really has nothing to do with tax rate."

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