Small business taxes control hiring. Really?

Posted October 18th, 2012 by russfrazierwp and filed in Business and Economy
Comments Off on Small business taxes control hiring. Really?

There has been a lot of political spin this year surrounding the issue of small business taxes. One side maintains that small businesses will hire more people if their taxes are lower. Presumably, tax is a cost that if eliminated or reduced, will allow the business owner(s) to shift this cost to the operational cost of employee compensation.

The first thing wrong with this assumption is that small business owners are chomping at the bit, ready to hire, if only the government would leave them alone and stop asking for tax revenue. Why is that wrong?

Office work

An office with workers

A business would not hire additional workers unless the revenue opportunities, i.e., demand, were sufficient to expansion. The number of workers is determined by the need to produce the goods or services. If a business hires more people than is warranted by revenue, their profits decrease. So that means if a business hired workers based on a decrease in their tax burden, the workers would not be able to contribute to revenue, given the lack of demand. In this economy, I haven’t heard one single small business owner say, “I need to expand because of increased demand for my product/service. In order to do that, I would hire more people, but I can’t because of the government.”

I’ve heard a form of the second part of that statement, not the first. And that bothers me because I think it is disingenuous.

The second thing wrong with the main assumption is that small businesses apparently don’t do any scenario analysis or contingency planning for environmental conditions beyond their control. Those items include government regulations, taxes and such things as globalization and communications technology. If you were to ask a small business person, “Why are you doing this?” One answer you’re likely to get is, “More control over my life and career.” Alright. More control means you understand what you can change and what you cannot and you work within those limitations. You don’t sit on your hands and act helpless because you don’t know if your tax burden will change by 10%. You make adjustments to your business so you are ready for such changes.

But let’s say there is this scenario: A small business is operating very lean, with workers putting in overtime without extra pay, taking other compensation cuts, like cheaper health insurance, no 401(k), etc. The workers complain they are overworked. If they could have just one more person, they maintain, it would make their lives so much easier. But the business owner says, “Sorry. I can’t hire anyone, not even one more person, due to the taxes we pay. Perhaps if our taxes were lower, we would do so.” Really?

To hire one more additional person, the business would have to realistically be assured of at least one year of salary for that person. Let’s say the employee makes $50,000 a year. A reasonable rough estimate of salary plus benefits and employment taxes would be 1.3 times the salary. So this means the business needs an additional 50,000 x 1.3  = $65,000 guaranteed additional money available for operational costs. If that money came from a tax break, it would come from an incremental decrease on a percentage of overall revenue. Now let’s say the business does $260,000 in sales per year. To obtain a $65,000 operational boost, the tax on that $260,000 would have to be cut to 10%. At a 35% rate, the tax burden on $260,000 is $91,000, and at a 10% rate the burden is $26,000, a difference of $65,000. Not even the Republicans are proposing a tax cut that deep.

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