16
Would an income tax hike hurt hiring?
A banner is posted by activists critical of corporate tax rates during a march and rally on April 17, 2012 in Los Angeles.
To view this content, Javascript must be enabled and Adobe Flash Player must be installed.
Kai Ryssdal: It's a truism of American electoral politics that candidates will say basically anything they want during a campaign, and it gets largely accepted as fact. Even when the only two candidates in a race are saying exactly opposite things.
Take, just for instance: President Obama, Gov. Romney and this week's topic -- taxes. Mr. Obama wants to let taxes on the richest Americans to go up; he says they can take it and besides, it won't hurt the economy at all. Mr. Romney says no indeed, raise taxes on those making a quarter million dollars or more and that hurts job creators and clobbers the economy.
We thought we'd do a little number crunching of our own. Here's Marketplace's Mitchell Hartman.
Mitchell Hartman: I started with a group called the S Corporation Association. They represent business owners who pass their business’s income through a corporation, partnership or sole proprietorship. Then they file a personal income tax return. These are the people whose taxes might go up.
There are 25 million of them, says executive director Brian Reardon.
Brian Reardon: Of those 25 million, 2.1 make more than the $250,000 threshold.
The other 23 million? They don’t make enough to get dinged under the president’s proposal. Let’s ignore them.
But not all the business owners who make $250,000 actually pay the top rate. A lot of them pay the alternative minimum tax. So the real number whose taxes might go up? Just under a million.
Still, they’re important, says Reardon. Their businesses make most of the profits and employ half of all American workers. But would they slow down their hiring if they had to pay more in taxes?
Bill Gale co-directs the Tax Policy Center at the Brookings Institution and worked for the Council of Economic Advisers in the George H.W. Bush Administration.
Bill Gale: All that’s being proposed by Obama is that those top two rates go back to the rates they were in the ‘90s. Entrepreneurship was quite healthy in the 1990s. There’s no reason to think that it would choke off huge amounts of business activity right now.
Gale also points out some of the highest-earning small businesses are high-flying financial partnerships. Or, sole practitioners -- doctors, lawyers, business consultants. Are they going to create more jobs just because their taxes don’t go up?
Small-business tax advisor Barbara Weltman.
Barbara Weltman: No, they’re never going to get bigger than one owner, but they’re still going to try to grow. And whether they take on an employee, or they use independent contractors, if they have more money to spend to enhance their business, they’re going to.
Bottom line: By our calculations, only a small fraction of the business owners who pay taxes as individuals, would see their tax bills go up under Obama’s proposal. And for many of them, the primary reason to hire or not hire probably isn’t their tax bill, but general business conditions. But for the ones that run the most vibrant growing businesses, it could make a difference.
I’m Mitchell Hartman for Marketplace.
Pages
Most of what I have seen on this subject is theory and speculation. If you look at historical data for top marginal tax rate and change in GDP since 1930 you will see that there is absolutely NO correlation between the two. Does anyone know if there is any real data to support the idea that raising the top rate to 40% will hurt hiring?
I enjoyed listening to this partial analysis. I'm not certain whether just looking at S-Corps gives a valid picture (small businesses could be registered as C-Corps for liability reasons as well as tax benefits) but I was struck with one thought...
If we're really only looking at an impact on about 1 million people, in the grand scheme of things we're looking at negligible impact on the national debt. Like many other political points, why are we even wasting time on this issue?
I've been hearing this argument for years and I'm glad to finally hear others ask this question: why would anyone take profits from their S-corp, pay personal taxes on it, and then reinvest that money to hire people? This tax is on the wrong side of the equation to affect any hiring. As mentioned below, at best it would impact whether you hired a gardener, but trickle-down theory is hard to argue when the income gap is spreading wider. A business operates to make money, not to make jobs. Give them more money and they will take it as profit. Employees are a business's biggest liability. A tiny tax credit will not make it worth while hiring someone if there is not sufficient demand to keep them busy. Only one thing creates jobs: demand (and maybe government).
Agreed Emma. The entire point of operating as an "S-Corp", sole- proprietorship, LLC or other partnerships is to avoid paying taxes twice. First as a regular corporation, and again on the income paid as salary or bonuses to the owner/employee.
So raising the taxes on earned income would indeed encourage small business owners to hire more help if needed - it's on Uncle Sam's dime. If not needed they are already leasing cars, jets, homes etc as business expenses. Of course there is always the dodge of calling your profits "capital gains". The U.S. tax code is a pure gift to "job creators".
If you do business as an "S" corp or other pass-through business form, and pay the highest income tax rate, you are either a true patriot or your tax accountant is stealing from you. Why this obvious fact seems to escape reports on how restoring tax rates on the successful just might discourage their desire to win is a puzzlement.
I used to work in the most competitive industry in the world (movies) and I can tell you that when you don't understand what's going on, remember, it's always about the ego, and never about the money.
This story shows a lack of critical thinking of the issue.
Of course increasing the taxes paid by those who make over $250k per year will hurt hiring (as it will everybody, no matter how much money they make). It probably won't directly harm hiring, as the story states, but it will definitely hurt hiring and job creation indirectly. For example, if somebody who made $500k was able to keep the tax money rather than giving it to the government, they have more disposable income. They go on more vacations, buy more gifts, buy more electronics, decide to do the home remodel they have been wanting to do, pay for somebody to take care of their yard rather than do it his or her self, etc.
It doesn't matter what Obama says, the MORE money you take from people, the LESS they have to spend, which HURTS the economic recovery and the economy's ability to create jobs.
Agreed, your comment shows a lack of critical thinking on the issue. Rich people save their money at much higher rates than average people. They simply make far too much money to spend it all. How many people making $500K a year need the services of payday loan agencies? And because of their high savings rate, very wealthy people have another huge advantage over average people: they can pay in cash in full for most big ticket purchases like houses and cars. Critically think about this: They are the ones lending to the rest of us! That is why taxing the very wealthy and hiring people to provide services the rest of us need - like teachers, firemen, police, air traffic controllers, food inspectors, clean water engineers, safe bridges, cancer research, soldiers, sailors, and border patrols, is a very good idea. The economy will grow due to the multiplier effect and even rich people will be better off. The money they pay in taxes will be more than offset by the money they will be able to earn in interest on their savings once the economy gets rolling again.
Really, more yachts? How about fixing some bridges, or our sorry air traffic control system first? Hire back the first responders and teachers who got cut back. The more people who make money, the more money gets spent, and if our country is restored to it's former greatness in the bargain, even the top 1% will be better off.
“Taxing the job creators” is just a smoke screen. Marginal tax rates are irrelevant to hiring for the vast majority of small businesses. Unless you're speaking of hiring very low-level employees, the cost of hiring an employee–salary, taxes, equipment, productivity losses in start-up & training–far exceeds any difference in the marginal tax rates.
I have a small professional service firm, and I currently fall under the $250k threshold for adjusted taxable income. And like most employers with even a modicum of economic sense, I hire as a last resort, based on work load; only when the current staff can’t keep up with the work load. If we have enough work to need more staff, we hire–regardless of tax rates.
So if we don’t have the work load, cutting my personal income taxes will put more money in my bank account, but couldn’t possibly induce me to hire additional staff. Because what drives hiring is demand, not tax policy. And you don’t generate significant demand by cutting taxes on the top 2%; they can already afford to hire us. What we need is broad-based growth to increase demand for goods and services, and that’s only achieved by reversing the decade-old trend toward redistributing wealth upwards.
Personally, I’m fine going back to the Clinton rates for everyone; the overall growth will help small businesses more than extending a fake “job creators” tax cut, and the reduction in deficit will help growth as it did in the ‘90s.
If a business hires more people, that is a business expense. Business expenses are deducted from income. Taxes are paid on income/profits. Please explain why increasing taxes on income/profits would discourage any honest business person from investing in their business by hiring more employees.
Pages
