The opinions listed below are from Matthew, one of the owners of SCW. We might have a rebuttal from one of our other owners.
"Do you think "job creators" are more likely or less likely to create a job if he/she is taxed less and thus has more money?" I was asked the other day. This seems to be a common question n this economic climate, so I though I would comment on it.
Do lower taxes create jobs?
As a business owner, I would like to state that this question is flawed from the onset. High income wage earners do not typically hire people; they are not the "job creators" but rather corporations are, and corporate expenses are subtracted before taxes are taken into account. Individual Income and Corporate Profit Tax Rates have nothing to do with whether a company hires another employee (but SS/FICA taxes can influence it somewhat by making the employee marginally more expensive -- in certain low margin businesses SS/FICA taxes can affect the financial viability of the company, bu these examples are rare). Low corporate taxes or high does not matter, because payroll expenses occur before taxation.
Secondly, it is not cash-on-hand that spurs the business community to hire at all. Businesses hire because demand has increased beyond current capacity. Business owners hire when we have increased demand in profit producing products, not when we have cash that has not been allocated to any other expense. So the corporate tax rate or dividend tax rate hardly enters into the computations for hiring. For all the talk of trickle down economics, the truth is that it really is that demand trickles up.
However, taxes can have a profound impact upon demand so I would like to speak about that for a moment.
A short-term lowering of taxes often has the effect of delaying expenditure taking (lowering B2B Demand), and raising taxes temporarily can increase business expenses (increasing B2B demand). This sounds complicated, so what does this mean?
We sell Security Cameras, which are elastic goods (this means that the demand fluctuates, unlike food which people need no matter how much money they have), but they are also B2B (business to business) goods (yes, home owners buy cameras, but the majority of our revenue is B2B). Security Cameras are elastic because our customers don't need to purchase them at exact predictable time periods to operate their business, and even if they help them reduce expenses or prevent a lawsuit, they have some flexibility in when they can purchase them. An even better example to show their elasticity would be when a business goes to upgrade their camera system because their flexibility in when they purchase is even greater.
How do taxes influence B2B demand?
Imagine two scenarios.
- This year a significant, one year tax increase was passed for corporations/dividends so that the tax man took 70% of the money. Corporate owners (who often don't need to be paid from their ownership as they are either retired, wealthy, or still earning a salary) would be incentivized to spend more as to not get punished by the government taking 70%, so they would look to spend as much of their profit on elastic goods as possible. If you have $100,000 in a corporate bank account and the government was going to take $70k of that if you took it out this year; you would say to yourself, "Hey, since I am going to lose most of the money I withdraw anyways, maybe I should spend the money that I made this year on upgrading my security system that way, next year when taxes go back to normal, I won't have to worry about the tax man taking as much and I won't have this expense to worry about."
- This year a significant, temporary tax decrease was passed for corporations/dividends so that tax man only took 5% of the money. This would mean that it would be cheaper to pay the owners (because the government would get less of the cut), so the owners would be incentivized to take the money out and put it in their savings accounts. They would be decentivized to spend the money, so they would put off spending the money on a security system until next year when the taxes went back up to 35%. Put another way, purchasing the security camera system in the year with the higher taxes rather than the year with lower taxes actually saves you money (since it would reduce one's tax burden to a greater extent).
(You may nit pick the arguments below because of the US debt scenario, however I am intentionally ignoring deficits for the moment and just talking in the abstract about tax policy and demand for elastic goods.)
This is the current problem with our economic system: we passed temporary cuts for the wealthy. Temporary tax cuts for the wealthy do the opposite of their intended effect, they incentivize saving - not spending -- and even though the government needs to save, the economy needs spenders to recover. It can be argued that permanent tax cuts (especially tax cuts for people who are more likely to spend the money -- the poor and middle class) creates demand for mostly B2C companies by allowing more money to be traded more quickly -- increasing the M1 money supply (the amount of money not trapped in savings or other illiquid assets like houses or stocks -- i.e. the money that is readily able to be spent), but tax cuts for the wealthy do not do this because the truly wealthy already have enough money for their spending needs and thus take the money out of the M1 supply and put the majority into savings, or bonds, or investments (which may not be in the US). It also can be argued that temporary tax hikes (especially corporate tax rates) increase demand by creating disincentives to save (granted this can also create market volatility if companies had no cash-on-hand from previous years' saving before they consciously tried to spend down their tax burden for the year, but right now the bigger problem is that almost all large corporations have too much cash-on-hand).
The view that "job creators" (i.e. corporations) will create jobs if they have more money, is true sometimes, just like the view that food tastes better if it has salt on it -- sometimes. There is such things as too much salt (and if you recall your history, salt was an early form of currency). The problem is that right now, too much money is sitting in the M3 and higher money supplies (the savings accounts, investments, and other accounts that don't trade around as much as money in the M1 supply); the rich are drowning in salt. In short, if the government had taxed me (and people like me) more (by not having passed temporary decreases in high income taxes) over the last few years, our company (as the owner of a business that sells elastic B2B goods) would probably make more money (even if we distributed less to the owners).
Of course, there are also scenarios where there is not enough salt, however those scenarios are not the problem that we are dealing with currently. Lastly, there are also scenarios where a long-term high taxation system would drive companies to other countries, but again that wasn't really the question that was originally asked or a potential problem in our current economic climate.