Job creation, capitalism, and tax cuts: are we really punishing the job creators if we raise taxes?

If you are one of the large percentage of unemployed people in America, this might be a familiar pose to you.  As of right now, the unemployment rate is a staggering 9.0%–objectively, that may not seem like a large percentage, but in reality, that’s about 13.9 million as of January 2011, which doesn’t even include people who are underemployed and barely getting by.  Of those, 6.2 million people had not been employed for 27 weeks or longer.  So, for many Americans, unemployment is a very pertinent issue at the moment.

What put me in mind of unemployment was a post that cousin made on Facebook.  ”You can’t be for job creation if you’re against job creators,” he said.  And I wholeheartedly agree with that–but not in the same way that I believe he does.  The notion of “don’t punish the job creators” has been floating around as an incentive to lower taxes on the wealthy/entrepreneur class in order to create jobs.  Now, I don’t agree with that assessment, which makes some people cry “class warfare against the wealthy!” and “don’t you want the economy to recover?”  Trust me, I want the economy to recover.  I want to open my own businesses one day, and despite being a flaming liberal, I’m also a pretty staunch capitalist.  While I have expressed the opinion that some functions should or could be run more efficiently by the government, that’s also due to my strong belief in capitalism; if a system can be run more cheaply, and better, and save consumers money for things that they need (like healthcare), they have more money to buy things that they want or start a business of their own, create jobs, and generate more wealth for our society as a whole.  I’m extremely capitalist.  I want to get that out of the way so I don’t get crap about being some commie lib.  I’m not talking about wealth redistribution.  I’m talking about wealth generation.

The first person who reads this whole post and accuses me of talking about wealth redistribution will have your comment creatively, and probably rudely, edited, because you clearly didn’t really read what I’m about to say and are so hypnotized by talking points on Fox News that you can no longer think for yourself.

That having been said, “punishing” the job creators with taxation isn’t going to have much, if any, negative effect on job creation.  The reasoning for not taxing them as much seems sound–”Oh,” they say, “if you tax entrepreneurs, they won’t create businesses, they won’t hire as many people, because it will be too expensive.”  That sounds reasonable–on the surface.  But really think about it for a minute.  If you could go into business for yourself and make more money than at your job working for someone else, would you, even if you had to pay more taxes?  Yeah, you would.  It’s the American dream, and even when the wealthy were being taxed at 90% in the 50′s, we had economic growth.  We were coming out of a depression, and coming strong–from the end of WWII until 1970, our economy was booming. If you own your own business, as opposed to working for someone else, the only limit on how much money you can make is how much demand for your product or service you can generate and how much of that demand you can supply.  Even if you’re being taxed, you can make more–a lot more–working for yourself if you have a sound business and good product or service; working for other people, you’re subject to their pay scale, their work-week, their rules, and unless you are making commission or percentage-based wages rather than a flat hourly or yearly salary, you have an upper limit as to how much money you can make.  (Even with percentage-based wages,  you have a lot of factors you can’t control: you have to sell their product, follow their company policies, generally work within the confines of their space, so you don’t have ultimate control over anything besides how well you sell a product.  Effectively, that also puts limits on your ability to generate income, although they are more esoteric.)  So, I don’t think that taxation is going to squelch the entrepreneurial spirit.  Small businesses were thriving in the 50′s, despite high tax rates.  That’s not just theory, it’s proof that business can not only survive but absolutely thrive at higher tax rates.

(Oh, 1950′s.)

Furthermore, my main beef with the idea that lowering taxes on the entrepreneur class creates jobs is that that doesn’t have anything to do with the mechanisms by which jobs are created in a capitalist system. Let’s look at one very specific kind of tax cut that is supposed to encourage employers to hire more people–namely, getting a tax cut if you hire more people.  I want to own a restaurant one day, so I’m going to use myself and my future (but for the moment, fictional) restaurant as an example.  It’s a small business and my employees probably won’t gross more than $20,000 a year (it’s a casual restaurant) unless they are management.  One tax credit aimed at hiring new employees was set at $5000 per new employee. (This was proposed by President Obama.)  But before deciding whether or not to hire a new person, ”First, I’d look to see substantial growth in the number of clients that need servicing,” says Ms. Skriloff, a small business owner who was quoted in the linked article.  The tax credit, it seems, would not be a major consideration when choosing to add more employees to her business.  Why is that?  Because a $5000 tax credit doesn’t nearly offset the cost of a new employee if the employee isn’t necessary for business.

Let’s go back to my casual restaurant.  Let’s say that I hire a new cashier at $8.00 an hour, 30 hours per week.  That employee is grossing $12,480 per year, not including any additional overhead that I will have for training or other expenses that go with hiring and maintaining an employee.  If I don’t need a new employee, or even if I’m on the fence but I find I can easily get by by working a few additional hours myself or re-arranging schedules, I will save at least $7480 not hiring a new employee, despite the tax credit; if I were to employ that same unnecessary employee longer than the first year, the only year in which I get the tax credit, their salary will continue to cost me money that I am not making up in revenue.  Why would I spend an extra $7480–and then at least $12,480 per year afterward–to create a job that will not earn extra revenue for me?  On the other hand, if I have sufficient demand that necessitates that I hire an additional cashier to help keep up with the orders, I will hire that cashier whether or not I get the tax credit, because if I don’t I am losing money.  Jobs will always be created for demand because a business owner wants to make as much revenue as possible.

Small business jobs–and large business jobs, for that matter–are created when demand is sufficient enough that the revenue from the additional business generated will not only offset the cost of an additional employee but will also cause the business to profit from the addition of a new employee. A tax break for hiring a new employee will only be a factor if it pushes the revenue of hiring a new employee higher than the expense–and even then, you potentially have subsequent years of employment to consider if you don’t expect rapid turnover.  Additionally, continuing to lower taxes on the entrepreneur class does nothing to create jobs.  If a business owner has extra revenue due to tax cuts, that revenue is quite irrelevant to job creation; jobs are created to produce revenue, not because of excess revenue.  In a capitalistic system, the majority of jobs are created by supply and demand.  I will hire an additional cashier if it helps me sell more food.  I won’t hire a cashier merely to get a tax credit, and I won’t hire a cashier because I have some extra money because my taxes are lower.  Job creation does not arise out of an altruistic, benevolent whim; jobs are created when there is work to be done.  If you look at the companies that have created the most jobs–Wal-Mart, Microsoft, UPS, McDonalds, et cetera–these are the companies that are widely popular among American consumers.  Consumption creates jobs.

Not tax cuts.

Tax cuts for the wealthy do increase job loss, however.  That’s right, I said it–lower taxes on the wealthy means fewer jobs.  Consumption creates jobs, as I said–that could be reworded as spending creates jobs, as consumers go out and spend money.  Government spending also creates jobs quite often.  What would happen if we put more money into education? Teachers could get raises, and then would spend more money in the private sector, and more spending would mark a demand increase and jobs could be created.  More teachers could be hired, which would have the same effect.  New books could be purchased, which would be done through a private publisher, which would create more demand and could lead to job creation in the publishing industry.  Same with technology as they replace or build on the equipment available to students.  Perhaps a school will do what my high school did and add a new wing to accommodate more students and classes; that will create more revenue for contractors, who are suffering a high unemployment rate right now.  All of those industries that see a revenue increase have employees that will be paid, and perhaps new employees that will be hired to meet this new demand, and those employees will go out and spend their money and create jobs elsewhere.

What happens when we decrease funding to schools because of less tax revenue?  Schools make do with what they have; they cut back spending; they cut back salaries; they cut back hiring; they don’t replace books or computers or upgrade technology nearly as often.  They cut out entire programs, such as music, which creates revenue in the private sector when the schools and students need to purchase instruments, sheet music, chairs, music stands, gasoline for field trips, special clothing, food and supplies for celebrations and parties.  You see, even if taxes are higher for the entrepreneur class, they get a lot of that money back because it gets spent in the private sector and generates revenue for businesses. Whether it’s a government employee’s salary that is spent on goods and services they need for their private life, or supplies or labor needed for the job that are in the private sector, the money is spent.  That’s why it is called government spending. It doesn’t disappear into some communistic hippie void. Increased spending correlates to increased demand which generates revenue which creates jobs.

Or, maybe you own a company that is frequently hired by the city to repair the roads, and the city cuts back on repair spending because of tax cuts; when this happens, you lose revenue.  You may have gotten a tax break as the owner, and that’s nice and all, but you would probably be making more money if you had that repair work.   Let’s face it, you can only get a credit on the income you earn, and if you are earning less because of less spending… well, you’re just earning less, period.  If the government had plenty of money to spend on repairs, your revenue would only be limited on the amount of wear and tear that motorists cause (which is apparently a lot, since I keep narrowly missing potholes EVERYWHERE IN COLUMBUS, grr) and the amount of work your company could do with your resources.  You save on taxes, you generate revenue; you can’t create tax savings, so your savings are limited to the revenue you can generate, which is, in turn, limited by tax cuts because of decreased spending overall.  I don’t know about you, but I’d rather pay a higher tax rate if it meant that I could generate a lot more revenue in return.  Work generates revenue.  Spending generates revenue.  Not working and not spending does not generate revenue.  So lowering taxes decreases overall revenue because it decreases spending, not only by the government but by private citizens who are losing revenue from lack of work from government spending.

But, you may say, if those entrepreneurs have more money, won’t they spend more money and create jobs anyway?  I mean, isn’t it all the same, whether they have it or someone else has it?  Hmm.  It’s a good point.  Let’s think about the spending habits of wealthy Americans.  Some wealthy Americans make a high salary but don’t manage their money well, and spend most of it, and yes, those types of people would likely create some jobs.  I would wager, though, that many, if not most, wealthy people, don’t spend the majority of the money that they earn.  Being wealthy probably seems glamorous to most who are not, and it probably seems like it’s all shopping sprees and caviar, but I don’t imagine the majority of wealthy people live that way.  For a normal person, there’s only so much spending you’re going to do on a day-to-day basis; I’d estimate that the bottom 85%-ish of people (being generous, I’d actually probably peg it closer to 90% or 95%) spend 75% – 100% or more than 100% of their income on a regular basis.  Food, clothing, housing, transportation, entertainment–all of that cash is going out into the economy.  Out of a sample of 1000 people that had the same wealth distribution as people in the US, that would be 800-950 people who are spending just about everything they earn and sometimes even more on credit.

For the 150 other people with enough income to live very comfortably and have a significant amount of money leftover? I very much doubt that they are running out to spend down to their last penny.  They’re saving.  They’re investing.  They’re purchasing the same necessities we are (maybe nicer ones, maybe not, probably in slightly larger amounts), they’re spending some on entertainment and luxuries, but the amount of things that the individuals purchase are probably not astronomically higher than the amount of things we individually purchase.  They’re not using the majority of that excess to create consumer demand, which is one of the reasons that the economy is so much weaker right now.  The rich are still rich–if the economy flourished because of spending by the rich, if the economy flourished because the rich created jobs with extra money, it wouldn’t be in trouble right now. They still have money to spend, their taxes have been decreased already, and their spending power has probably not been very affected unless they lost their jobs or their businesses.  Middle and working class people? Unemployed people? Not spending nearly as much as they did a little over a decade ago.  The significant change has been to the spending habits of the middle and working classes, not the wealthy classes.  If you can locate the significant change, you can locate the source of the problem and work toward finding the solution.  The source of the problem is that the lower classes don’t have any damn money.  Tax cuts for the rich are hindering, rather than solving, that problem.

So, why do politicians tell us that “job creators” need to be taxed less in order to create more jobs?  If that were true, our economy would be bursting right now.  Job creators are taxed less, via the Bush tax cuts.  Job creators did not use their tax revenue to create jobs–and they shouldn’t have according to any traditional business sense, or even common sense, because that would only increase costs and not revenue.  I’m not saying that the entrepreneur class is at fault here for not using that money to create jobs sooner; “having extra money from taxes” is an asinine reason to create jobs.  Having work that needs to be done to meet need or demand that can’t be accomplished with your current staff level is the only economically sound reason to create a new job.  And what I find blackly hilarious about this completely transparent attempt to put a few more dollars in their pocket (not create jobs) is that they’re really just shooting themselves in the foot–if we’re not working, if our jobs aren’t enough to make ends meet, we can’t spend and generate revenue for them.  If we had more money, we’d spend more, and they would earn more; that’s why business was booming in the 50′s and 90′s–it didn’t matter if the rich got taxed more, because the spending increase that resulted from it was making everyone more prosperous.  Guess who is making money off of this deal?  The politicians who are convincing everyone that it’s a good idea and raking in the corporate donations for this great “benefit” of lower taxes.

Ladies and gentlemen, rich or poor, we’re all getting screwed in this deal.  Write your congressmen.