Find a pencil and a sheet of paper. Let’s put some thought to the argument that letting the Bush tax cuts for wealthier Americans expire will cost jobs. Let’s also think a little about how taxes affect hiring. If you listen to lawmakers — Republicans mostly — and business owners, you might believe that taxes are the key factor in hiring and investment decisions. Does that make sense?
I don’t want to confuse politicians and talk show hosts, but there is more to hiring decisions than taxes alone. There are broadly defined considerations called Marginal revenue Product and Marginal Factor Costs. But that gets all complicated and involves equations and things. No need for that. A business will hire as long as the cost of hiring is not greater than the profits that the hiring produces. Simple.
Let’s pretend that the business and the owner are one and the same.
The employee , in this example, would have to be a cost of labor that falls exactly on costs/revenue equilibrium, right at MRP=MFC, and be paid straight out of the business owner’s personal profits. But how realistic is this? Is this the way a business operates in the real world? Probably not.
Forget about all the other costs of production, fluctuations in demand, marginal returns, and so forth that play into businesses operating in an economically vibrant market. Let’s just say the only two variables are the cost of hiring workers and the business owner’s profits. (Not accurate for a couple reasons, but this seems to be the universe we’re asked to accept.)
In this example this business owner is a person earning over a $1 million if he is looking at a $40,000 increase on personal taxes if the Bush tax cuts expire. The “firm” — the business owner — is still making a profit. The business owner would have to see a perfect correlation of $40,000 in profits matching the cost of this worker, but…
When we look at the overall costs of production, we are talking marginal costs and revenues and we’re assessing them in terms of revenues, not personal profits. In a perfectly competitive market, wouldn’t another firm move in to undercut the excessive revenue margin (the owner/firm “profit”) enjoyed by the owner/firm? In a competitive market, wouldn’t there be other businesses willing to operate profitably, but at less than $1 million, if it would increase his business?
That’s the problem here. The firm is not the owner and the owner is not the firm, not in an economic sense. Moreover, there is more than one cost of production; other inputs are responsible for production and ultimately business revenues and profits…or losses. If the business owner is going to cut production because his personal income decreases, we don’t have a business operating at an economic equilibrium. Right or wrong?
Someone come help me out here. Aren’t these income tax arguments confusing the economic efficiencies of the firm with the personal incomes of the people who profit from them?
Do business owner’s hire because they have money to pay for a hire or do they hire because the investment in an additional unit of production — a worker — results in profits for the business that are greater than the cost of the investment?
And doesn’t it boil down to this: The business owner and the business are not one and the same. The profits are a business liability paid to the owners. If the business if profitable enough to pay the liabilities the worker — and other inputs — must be economically efficient. The idea that “job creators” (e.g., people with money, I suppose) will magically create jobs simply because they have money to do so is absurd and false. We have 30+ years of labor market history with which we can judge this claim. And yet the same faulty arguments remain active in legitimate discourse.
I am open to talk about it.
- Small Business Taxes: Fact-Checking The GOP’s Claims (huffingtonpost.com)