There are few myths that keep popping up as much as the one that says higher income tax rates will kill jobs or hurt the economy.
But this particular yarn is harder to eradicate than a sturdy cockroach, and keeps getting dusted off whenever it’s needed. Small business owners know it’s just not true.
The theory being forced on us is that higher taxes will cost jobs, depress the economy and hurt job formation.
This writer has owned a business for over 30 years and knows just how much fiction this theory involves.
The argument is in the arsenal of most who oppose higher taxes. Today, it’s not so much the argument of Republicans or the rich as of the tea party, which is threatening to produce a whole new flock of candidates in 2014 to run against more traditional Republicans.
The theory is that with higher taxes, small businesses owners will have less money to hire people and grow their businesses. It’s a simple proposition that makes no sense.
Most small businesses — the kind we count on to create lots of new jobs — are set up so that income from the business is taxed directly to the owners, so that there isn’t the same “double taxation” as there would be on a larger dividend-paying enterprise.
Taxes are a portion of money that has already been earned. The best way to reduce your tax bill is to reduce your income. It doesn’t make much sense to pull that trick since you’ll lose more money than you’ll save on taxes. Business owners usually, in the words of any business book, try to “maximize income.” They want to make as much as they can. A portion — say, 20 to 35 percent — they pay in taxes to the feds, with more to the state.
Business owners don’t usually hire more people unless and until they need to expand the business. They need to meet new demand. Sometimes the demand comes from within — such as a new product or great marketing — and sometimes the “rising tide that floats all boats” suggests the economy is improving.
On occasion, a business doesn’t wait for consumers to demand its product. It hires and expands because it gambles that the “dogs will eat the dog food,” in the words of venture capitalists.
The same process in reverse causes businesses to shrink. There just isn’t enough business to keep everyone around. That can be because the economy’s bad, the product is bad, or the business just isn’t run well. Whatever.
There is one excuse conspicuously absent from why a business doesn’t hire: income taxes. Few small business owners know a soul who has actually said that tax rates matter. That’s because tax rates don’t even enter the picture until all the income has been counted. Business worry about expenses. Income taxes aren’t part of business income or expense. Expenses do matter, so you’ll watch rent and payroll. Some taxes are expenses and do matter — such as unemployment or even city business taxes. But income taxes don’t count.
If you say you won’t expand because of income tax rates, you’re saying you’re willing to make less money. Perhaps you’re working too hard, or you’re getting tired of the hassle. The reasons go on. But the tax you’ll owe on income you’ve already made is not one of them.
You have to be math-impaired to want that. Out of each dollar, you’ll keep 60-65 cents, depending on your bracket, and pay the rest in taxes. So, to lower the 35 cents you’re paying in taxes requires giving up the 65 cents you had to make to owe the bill. That’s the math problem.
You’ll never refuse to hire because taxes are too high, because the urge to “maximize profits” kicks in well before then. The opportunity’s either there or it’s not. You’ll take the gamble if it is, and worry about the taxes later.
Nobody complains about the Clinton era because they recall “high taxes.” You may have skipped it because of Monica or because you watched too many episodes of “The West Wing” to notice. But you didn’t complain about taxes then, unless you’re constantly complaining anyway. There are pills for that condition.
The Clinton era had the higher marginal tax rates — 39-plus percent — that are sparking “high tax” fears today. That’s what we’d revisit under the “fiscal cliff.” The math is not so bad as the sudden shock to the system of less general spending.
Most states have long had what’s being debated in Washington: a surcharge on higher incomes. Further, the “1 percent” isn’t complaining. Polls show they’re generally patriots who will pay a little more as long as it improves life — and that all their friends are in the same boat. Grover Norquist and the tea partiers are complaining. They generally oppose higher taxes on any day, and oppose “spending” in any year. Under the doctrine of “starving the beast,” they’d rather the U.S. not pay the taxes we’ve already run up. That’s a little like going to dinner with a friend and then sticking him with the bill.
You basically need a death wish to cut your income so you can cut your taxes. There are many great ways to reduce taxes, but few involve reducing income.
For the most part, if you owe more in taxes, it’s because you made more money. That’s not such a bad deal, is it?
The writer (email@example.com ) is a founder of the Aspen Daily News and appears here Sundays.