Why are we being told that lowering taxes on "job creating" rich people will have a positive effect on the economy, unemployment, and somehow balance the Federal budget? In 2001, we enacted the "Bush Tax Cuts", but unemployment has doubled since.
At the time, the government was running a record budget surplus and was starting to pay down the national debt.
Now, we are facing economic collapse and another recession.
Underemployment is around 19%, we are running a trillion dollar deficit and people are worried that congress will force us to default on our debt.
Tax rates for the wealthiest Americans are at historic lows, yet these once "deficits don't matter" politicians are saying we need to cut spending and lower taxes even more to create jobs.
Let's take a common sense look at job creation.
First of all, why does a business exist? To make money, right? And to do that, most businesses take what we call "calculated risks.
" If money was free, why would anyone take any risks? To get started, what we need to understand is the difference between income and profit.
Businesses are taxed on their profits (taxable income), not on total income or gross receipts.
For this example, let's use a corporation filing using the 2011 IRS tax table.
If this business has sales of $1 million and expenses of $800,000, they have a profit of $200,000, and that is the amount the business is taxed on by the IRS.
Their tax bill would be $61,250, leaving them with $138,750 after taxes.
What some would like you to believe is that by lowering the tax rate for small businesses or corporations, they would have increased profits, or taxable income.
They want you to think that if a business was thinking about hiring a new technician or buying a new vehicle, that the money would come out of the $138,750.
In reality, expenses such as payroll and equipment are taken out of "pre-tax" dollars, or added to the $800,000 amount.
So, in essence, hiring a new technician at $50,000 per year would lower the taxable income amount on this example corporation to $150,000, and the tax owed to $41,750, leaving the company with $108,250 after taxes.
Yes, paying this new technician a $50,000 salary and benefits package only costs this company $30,500 to the bottom line.
That's if this new hire produces absolutely nothing.
This leads us to the discussion of changing the tax rate.
In the previous example, I used the actual tax table for the current year (2011).
Republicans and Tea Partiers lean towards creating a zero tax environment and Liberals lean towards a much higher corporate tax rate.
So let's use effective tax rates of 0 and 50 as our test study.
If a business owner like our one above is raking in a million and paying out $800,000 in expenses and is taxed nothing, he keeps $200,000 and lives comfortably.
Let's say he's on the fence about hiring a new guy, but wants to calculate the risk.
He's not going to hire anyone unless he is absolutely sure he can profit from him the very minute he hires him.
If there's any chance at all that this new hire will have a negative effect on the owner's bottom line, chances are that the owner will just continue to enjoy living on $200,000 and do nothing.
Now, let's say the tax rate is 50% and this same guy is bringing in $100,000 after taxes.
Still, a comfortable living, but he would like to calculate the risk in hiring a new guy.
In this instance, it only costs the business owner $25,000 net to hire a $50,000 per year employee.
A typical business model would say that each employee should bring in 2-3 times their salary/benefits in gross receipts, so this business owner stands to gain up to $150,000 in gross income for only a $25,000 net risk, or six times his investment.
The zero tax rate scenario would be more like a return of 3 times.
Do you see how the higher tax rate scenario encourages businesses to take more calculated risks and spend money rather than hoard it? That is why my opinion is that a low corporate tax rate environment is not a "job creator.
" Does this mean business owners are lined up to tell their congressman to raise the corporate tax rate? Absolutely not! In fact, they take out their calculators and see how much money they could afford to spend on lobbying for lower taxes.
It's just easier to do nothing, like a stoner with the rent paid.
But it's not necessarily in their best interest.
We all want to pay less taxes, obviously, but the act of lowering or raising the corporate tax rate rarely changes the actual amount of tax a corporation pays.
If the tax rate is higher, they must find ways to spend money to avoid paying taxes; if the rate is low enough, they'll just keep it and continue to pile it up in neat stacks, have money fights, or whatever they do.
Promoting a higher tax rate does not necessarily mean someone wants a corporation to give all that money to the government, but rather look for ways to spend a larger percentage on goods and services.
Keeping people employed and businesses profitable creates spending.
And that is what drives an economy.
The upside to business owners is that they are "forced" to look for ways to improve their business, and this could lead to far greater gains than ever imagined.
The upside to the national deficit is that more "taxpayers" are created.
At the time, the government was running a record budget surplus and was starting to pay down the national debt.
Now, we are facing economic collapse and another recession.
Underemployment is around 19%, we are running a trillion dollar deficit and people are worried that congress will force us to default on our debt.
Tax rates for the wealthiest Americans are at historic lows, yet these once "deficits don't matter" politicians are saying we need to cut spending and lower taxes even more to create jobs.
Let's take a common sense look at job creation.
First of all, why does a business exist? To make money, right? And to do that, most businesses take what we call "calculated risks.
" If money was free, why would anyone take any risks? To get started, what we need to understand is the difference between income and profit.
Businesses are taxed on their profits (taxable income), not on total income or gross receipts.
For this example, let's use a corporation filing using the 2011 IRS tax table.
If this business has sales of $1 million and expenses of $800,000, they have a profit of $200,000, and that is the amount the business is taxed on by the IRS.
Their tax bill would be $61,250, leaving them with $138,750 after taxes.
What some would like you to believe is that by lowering the tax rate for small businesses or corporations, they would have increased profits, or taxable income.
They want you to think that if a business was thinking about hiring a new technician or buying a new vehicle, that the money would come out of the $138,750.
In reality, expenses such as payroll and equipment are taken out of "pre-tax" dollars, or added to the $800,000 amount.
So, in essence, hiring a new technician at $50,000 per year would lower the taxable income amount on this example corporation to $150,000, and the tax owed to $41,750, leaving the company with $108,250 after taxes.
Yes, paying this new technician a $50,000 salary and benefits package only costs this company $30,500 to the bottom line.
That's if this new hire produces absolutely nothing.
This leads us to the discussion of changing the tax rate.
In the previous example, I used the actual tax table for the current year (2011).
Republicans and Tea Partiers lean towards creating a zero tax environment and Liberals lean towards a much higher corporate tax rate.
So let's use effective tax rates of 0 and 50 as our test study.
If a business owner like our one above is raking in a million and paying out $800,000 in expenses and is taxed nothing, he keeps $200,000 and lives comfortably.
Let's say he's on the fence about hiring a new guy, but wants to calculate the risk.
He's not going to hire anyone unless he is absolutely sure he can profit from him the very minute he hires him.
If there's any chance at all that this new hire will have a negative effect on the owner's bottom line, chances are that the owner will just continue to enjoy living on $200,000 and do nothing.
Now, let's say the tax rate is 50% and this same guy is bringing in $100,000 after taxes.
Still, a comfortable living, but he would like to calculate the risk in hiring a new guy.
In this instance, it only costs the business owner $25,000 net to hire a $50,000 per year employee.
A typical business model would say that each employee should bring in 2-3 times their salary/benefits in gross receipts, so this business owner stands to gain up to $150,000 in gross income for only a $25,000 net risk, or six times his investment.
The zero tax rate scenario would be more like a return of 3 times.
Do you see how the higher tax rate scenario encourages businesses to take more calculated risks and spend money rather than hoard it? That is why my opinion is that a low corporate tax rate environment is not a "job creator.
" Does this mean business owners are lined up to tell their congressman to raise the corporate tax rate? Absolutely not! In fact, they take out their calculators and see how much money they could afford to spend on lobbying for lower taxes.
It's just easier to do nothing, like a stoner with the rent paid.
But it's not necessarily in their best interest.
We all want to pay less taxes, obviously, but the act of lowering or raising the corporate tax rate rarely changes the actual amount of tax a corporation pays.
If the tax rate is higher, they must find ways to spend money to avoid paying taxes; if the rate is low enough, they'll just keep it and continue to pile it up in neat stacks, have money fights, or whatever they do.
Promoting a higher tax rate does not necessarily mean someone wants a corporation to give all that money to the government, but rather look for ways to spend a larger percentage on goods and services.
Keeping people employed and businesses profitable creates spending.
And that is what drives an economy.
The upside to business owners is that they are "forced" to look for ways to improve their business, and this could lead to far greater gains than ever imagined.
The upside to the national deficit is that more "taxpayers" are created.