Taxes v. Employment
Jenson Hagen
Do taxes interfere with a business' ability to hire workers?
During the debates, the Republican Senators Gordon Smith and John McCain both made this claim that higher taxes prevent businesses, Joe the plumber's business in particular, from hiring more people. Sorry, but this claim does not hold up if you truly understand how the tax system works. For the record, a business will pay income taxes on NET PROFITS, even in the state of OR.
A company will generate revenues and pay expenses in an effort to support the creation of revenues. This is simple math: revenues minus expenses equal net profits. Then we introduce the tax system. A C corporation will pay according to corporate tax rates. An S corporation, LLC, partnership or sole proprietorship will pay according to individual tax rates. In both instances, these are graduated, progressive rates that increase the more you make. If Joe the plumber operated under an S corporation and had no other income or deductions, then Joe the plumber would have paid Federal taxes of $43,351.25 on net profits of $250,000 last year, or roughly 17%. And as an S corporation owner, Joe the plumber could avoid paying a fair share of Social Security and Medicare taxes by paying himself a low, low salary. It's done all the time!
Here's a free tax planning tip if someone would like to forward this to Joe the plumber. YOU CAN DECREASE YOUR FEDERAL AND STATE TAX LIABILITY BY HIRING MORE WORKERS. Yes, the opposite is true of what we are being told by our Republican Senators. Imagine that! If OR or the Federal government increased these tax rates, then Joe the plumber could still hire as many workers as he desires and reduce his tax liability in the process. In fact, there is greater incentive to hire workers when tax rates are high. The psychology is such that when tax rates are low, business owners could care less about minimizing net profits. They would rather take the tax hit and pocket the remaining dough. When tax rates are high, however, small business owners seriously contemplate incurring greater expenses, investing more in the organization's revenues and avoiding taxes in the process.
If you increase tax rates to a reasonable level, then small business owners have more incentive to hire workers. Beyond a certain point, high tax rates will start to deter individuals from taking the risk of starting a business since it leaves them with less, but 17% is nothing to complain about. Especially since Joe the plumber can further reduce his tax liability with itemized deductions, such as the mortgage interest from his interest-only loan he got from the deregulated banking system. Joe, if you're reading this, quit whining about taxes, start your business, hire more workers and get into an interest-only loan. You will greatly reduce your tax liability and live the American dream.
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Oct 16, '08
There is a lot of nonsense (aka horseshit) being peddled by all sides in this discussion. If you own a business, you can avoid paying any tax at the corporate level by paying everything to yourself as salary before December 31st. There are some theoretical upper limits, but I have never seen a small business bump into those limits. You don't need extra employees or extra deductions. You will pay income tax on a personal level (plus social security, medicare, etc.) but there is no "extra" tax. If Joe Plumber is netting more than 250K after expenses, he will pay more tax under the Obama plan, but who cares.
In my experience, there are 3 things small business owners hate. First is the minimum wage. Too bad! Second is the anti-discrimination rule for fringe benefits. Owners hate that they have to provide health care benefits to all employees in order to get the deduction for themselves. Too bad! Third is the anti-discrimination rule for retirement plans. Owners hate that they have to give all employees 401K benefits if they are going to pay benefits for themselves and their highly compensated employees. Again, too bad!
McPain is a bozo. Obama is the future.
Oct 16, '08
"but 17% is nothing to complain about. "
Now add in the State tax The Trimet tax Employer's match for FICA (SS) License fees Portland tax Business property tax Real propety tax Cost of preparing varous state & Fed reports .... Add it all up an you are easily over 50%, especially for the self employer "S" corp where you have to pay double the SS (both sides) and Medicare.
Does this give you a hint why companies move out of the USA - it's not just the labor cost.
I'll bet you were never self-employed or ran a small business.
Oct 16, '08
"McPain is a bozo. Obama is the future."
BO is not the future - he is a throwback to the failed policies of the Soviet Union.
From each to his ability, to each according to his needs = they pretend to pay us and we pretend to work.
Oct 16, '08
Jan - if you are talking to me, I am an owner of a small business that grossed around 8 million last year. Paying our employees a fair wage with fair benefits is how we make money. Tax rates have no impact on our business model, except that we distribute all profits before December 31st to avoid corporate income taxes, which in a "C" corp can be painful.
McPain's health care plan may cause us - and many other employers - to stop offering medical insurance to our employees. His tax cuts would probably make me more money, but will screw my employees and lower paid co-workers and, in my opinion, our entire country. I would rather pay my share and live in a strong country that I can be proud of.
F the Repubs.
Oct 16, '08
Thank you Greg! Thanks for showing both Jenson and Jan how utterly ridiculous they are. Jan is obviously far more ridiculous, but at least she probably won some McCain-bucks for posting here.
The idea that taxes magically create jobs is silly. So a business owner will forego getting paid and hire new employees, just to avoid paying a tax? Wow, that's one stupid business owner!
If we cut taxes, businesses WILL do a little better. They WILL create a few more jobs. But at the same time, our national deficits will continue to rise, and government wont be able to do its job.
We don't get a tax increase for free, it does cost something. So be it. I am willing to pay that price for the ability to live in a great country. Like Joe Biden said, paying taxes IS patriotic (but he never said it comes for free).
Oct 16, '08
Like Joe Biden said, paying taxes IS patriotic (but he never said it comes for free).
They why doesn't everyone show the same level of patriotism and pay the same tax rate on all income. That would be the noble thing to do.
Oct 16, '08
Let's look at what happened after three big tax-change events in the last 30 years.
In 1981 the Reagan tax-cuts were passed. Unemployment had been at 7.1% in Carter's last year and 7.6% in Reagan's first year, but it leaped to 9.7% and 9.6% in the next two years. Clearly, tax cuts did not have a good effect on unemployment rates.
In 1993 the modest tax increases were passed during Clinton's first year. Unemployment had been at 7.5% in Bush I's last year, and 6.9% in Clinton's first year, and unemployment went down every year of Clinton's Presidency.
Then, in 2001 the Bush II tax cuts were passed. Unemployment had been at 4.0% in Clinton's last year and 4.7% in Bush's first year, climbed to 5.8% and 6.0% in the next two years.
The claim that tax cuts increase employment and tax hikes decrease employment just isn't true.
Oct 16, '08
Obviously mp97303 is trolling, but it does bring up something for me.
I've always been interested in the flat fax concept- i.e 0 tax on the first $50-75k of income, and a flat 18-21% for everything after that. No deductions, credits, etc. Also no CPA's for tax prep. My understanding is that it would be approximately revenue neutral.
With $75k and 20%, someone making $50k/year would pay $0 in taxes, someone making $100k would pay $5,000 (5%), someone making $250k would pay $35k (14%), and someone making $1 million would pay $185,000 (18.5%). That seems fairly reasonable to me.
I'd be interested in what people here think about that. Is that a crazy idea?
7:36 a.m.
Oct 17, '08
Jan sez: "BO ... is a throwback to the failed policies of the Soviet Union."
Jan, you either are deeply mired in profound intellectual dishonesty, or you are an idiot, or probably both.
"To each according to his needs, from each according to his abilities"
Yeah, you know, liking feeding and clothing and educating kids, and trying to make sure old folks don't have to eat cat food, and comforting and helping the afflicted and sick, and succoring the poor. It's a philosophy, not a policy. If you don't like old Karl's way of putting it, consult the Sermon on the Mount, or the teachings of Hillel, or of the Compassionate Buddha, or the Quran, or Lao Tzu, or the Sutras, or the recorded oral traditions of all kinds of peoples around the world.
8:26 a.m.
Oct 17, '08
They why doesn't everyone show the same level of patriotism and pay the same tax rate on all income. That would be the noble thing to do.
It would be neither noble nor equitable for the very simple reason that the affluent have access to a fundamentally different level of our government and way of life than the poor do. Just ask O.J. or Kobe Bryant.
I've got a grizzled old curmudgeon of a CPA friend who is very conservative and even he readily concedes that progressive taxation is, on it's face, equitable and just. His argument is over how progressive it ought to be rather than whether it ought to be progressive at all.
Oct 17, '08
DB said:Obviously mp97303 is trolling,
What does that mean? Is a troll someone who disagrees with you? If it is, it sure makes you seem petty to name call someone who may have a different opinion than you. Or maybe a troll is someone who is voting for Obama, Merkely & Schrader? If that's the case, then I am a troll.
Oct 17, '08
Fbear,
Anecdotal figures do not tell the story. If you have more, you spend more and invest more. You all keep trying to say that taking more of my money will somehow end up putting more money into my pocket. Are you insane? You cannot tax me into prosperity. Period. Stop the freaking spending. And if you want to keep gagging on this tax crap, please give us the answer to this question, and re-answer it everytime you give a tax argument:
HOW MUCH IS ENOUGH??!?!?!?!??! Aggregate 50%+ is a real number for a lot of folks these days. You want 75%?? 90%?? Govt will spend every frickin penny you give it, including the rainy day fund. You want to send in your money, great. I DONT.
Oct 17, '08
Its economic analysis' like this post that makes democrats look stupid.
Using Mr. Hagan's logic, if I reduce my employees wages, I'm giving them a tax cut.
Oct 17, '08
DB: getting to the merits of your post... I am an accountant and I think you taxation threshold of 50-75K is probably too high to be revenue neutral. What I have heard talked about is something like 10K per adult and 5K per child. This would equate to a threshold of $30K for a family of four. I would be curious to know what percentage of households would end up tax exempt at your levels. Seems to me it would have to be more than 75% which I think would not be politically feasable.
Kevin: What you are talking about is two different things. Taxation and access to the powers that be. As far as the poor and "way of life" goes, I know many people who would be considered "poor" and they think everyone should contribute the same. They overwhelmingly support a "flat tax" type of system where everyone pays the same rate.
4:51 p.m.
Oct 17, '08
Jenson -- nice piece! Glad you made this point!
8:36 p.m.
Oct 17, '08
I think some people could miss the obvious point of this article since I included some tangent points.
Taxes in no way affect an organization's ability to hire workers since taxes are levied on net profits. An organization will make the decision as to how many employees it can hire based on revenues. Taxes in the state of OR and at the Federal level are not based on revenues. They are based on net profits which are the final product AFTER taking into account wage and payroll expenses as well as any other expense the business incurs.
So don't miss the obvious: taxes have zero impact on an organization's ability to hire more workers, even payroll taxes. Sorry, but the Republicans are wrong on this point.
Oct 17, '08
And as an S corporation owner, Joe the plumber could avoid paying a fair share of Social Security and Medicare taxes by paying himself a low, low salary. It's done all the time!
The IRS requires that Joe pay himself a salary commensurate with the position he holds. If Joe is the President of a business that grosses $5M per year and pays himself a salary of $15K per year, Joe will be audited.
The general rule of thumb is that your salary should be at least 50.1% of your net income and appropriate for your position.
Oct 18, '08
dddave,
Actually, you're the one who is relying on anecdotes.
There just is no evidence that lowering taxes for the wealthy improves the economy, and no evidence that increasing taxes on the wealthy hurts the economy.
We've had terrible economic times after two different tax cuts for the wealthy, and we've had a solid economy after a tax increase for the wealthy.
I'll take Clinton's economy over Reagan's or Bush's any day.
Oct 20, '08
dddave sez: You cannot tax me into prosperity. Period.
Wrong. Taxing the highest levels of income (amounts over $400,000 per year) at rates between 60% and 90% is what ended the Great Depression, won World War II and created the Baby Boom Prosperity of the 1950s-1960s. Corporate and Estate Taxes were in the same range.
Preventing too much wealth from accumulating at the top of the income/wealth spectrum is exactly how you create prosperity. Letting wealth concentrate at the top (through lack of regulation and anti-worker laws as well as tax policy) is how we created the Republican Great Depression of 1929, the worst recession since (Reagan's) in the 1980s, and what will be soon seen as the Second Republican Great Depression of 2008.
Lots of info at Visualizing Economics.