Thursday, November 25, 2010

Who is for austerity now?

I'm no economic expert... But I have taken some business classes and I think I understand the basic tenets of business strategy. Also, it's really not that complicated. I'm surprised it's a four year degree... whatever.

Look: the idea that raising tax rates on the top two income brackets is going to lead to a decrease in job creation is logically absurd. Let's go over something simple:

Job creation is not tied to profit margin. Job creation is tied to demand.

It's true that if you aren't a smart business owner and are prone to irrational decision making, you might be influenced by the fact that your post-tax take-home margin of profit is smaller (and you won't be in business for long). But for those under the influence of reality, a business owner is going to capitalize on increases in demand (probably by hiring workers) regardless of what their profit margin is (in this way, they will increase their profit margin). Additionally, they won't add jobs if there isn't demand for their products.

Let me just repeat this: the more demand there is, the more jobs there will be. Likewise, the less demand there is, the less jobs there will be.

Let's say I own a business manufacturing plastic frogs and I gross $100 a year. I pay $30 in taxes every year. I pay $20 in wages to my workers and another $30 to actually manufacture the plastic frogs. This leaves me $20 that I get to take home as my personal profit.

Assuming I'm running an efficient business (every worker is contributing to the bottom line), what would happen if my taxes were increased? Would I fire some of my workers so that I could have more "take-home" pay? Probably not, because then I would be making less money in the first place and wouldn't necessarily have more "take-home" pay. However, I wouldn't necessarily hire more workers either (unless there is unsatisfied demand in the market). It's fair to say that personal income tax rates (of business owners) don't influence employment numbers.

Having said that, there is one scenario where raising taxes can hurt job growth, when raising taxes hurts demand. If we raise taxes on people who would have used that money to buy things, we're hurting demand. Since poor people usually have a marginal savings rate and are therefore usually spending all their money to buy things, we shouldn't raise taxes on the poor. However, the rich are an entirely different story. The wealthy have much higher savings rates and it's true that they often wouldn't be spending more on consumer goods if they were taxed less. Therefore, raising taxes on the poor would hurt job growth, but raising taxes on the rich would not.

If you don't believe me, check out the facts.

In other words: contrary to what Republicans are saying, raising taxes on the wealthy isn't going to cause businesses to fire workers or even stop hiring. Tax rates on the wealthy and job creation are two unrelated concepts.

I'll go one step further. If we taxed the wealthy more (which wouldn't hurt job growth), and used that money on social programs for the poor (giving them more money to spend) we would actually be helping the economy and encouraging job growth.

So, when it comes to the Bush Tax Cuts, there is only one thing to determine: what constitutes "rich" in the sense that "rich" means you'll save money from tax cuts instead of spending it. We ought to do what President Obama is suggesting: extend the tax cuts for the middle and lower classes and let them expire for the rich.

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