Thursday, October 9, 2008

Taxing Cuts For Jobs And Borrowing To Pay Salaries

I like to think I am a logical fellow. Here is something I am having a hard time rectifying. I hear conservatives, including the republican candidate John McCain say that, “cutting taxes will encourage business to hire more people.” However, in June of 2001 the biggest tax cut in 20 years was signed into law. The problem is every year since it was enacted we have seen a reduction in good paying jobs such as auto, steel, and tech industry. According to the Bureau of labor statistics linked here, in 2001 the unemployment rate skyrocketed until it finally peeked mid 2003. So exactly again what is supposed to happen once these tax cuts are made?

Oddly enough, that is about 24 months (about the length of unemployment compensation) after the trend began. These statistics only tell half of the truth. If you fall off the unemployment wagon, they assume that you must have found a job. The graph also can’t tell you how many people went from putting the tires on the new vans at the Ford Plant to putting on new tires at the Wal-Mart. They also went from making $60 to $80 thousand a year plus really good benefits to making $20 to $40 thousand a year and being showed how to use public services to get medical help. However, as far as these raw statistics are concerned both groups are employed. I was really part of both of them at that time.

Now I am not agreeing whole heartedly that tax decreases don’t create jobs. There is evidence that they do. A common sediment can be found in this article about the Auto industry.

"Another problem since 2001 has been auto parts supplier pressure, which is
coming from China. Even though the local industries are able to manage the
pressure from suppliers from China, but the impact of it is enormous. For
example Crysler automaker has responded by lowering profits and asked supplier
to reduce price by 5 percent in 2001."

You want to talk about trickle down, no make that stream down, economics. When one of these good paying industries moves out of town, people stop participating in the economy and everybody starts feeling under employed.

It seems that job creation in China has run rabid. It is amazing how much cheaper you can produce goods if you don’t have to worry about safety, health, toxicity, mandatory wages, or the environment. But at that point you are playing a game of Jenga and we know how every game of Jenga turns out.

More illogical kinks in the “reduce taxes to spur employment” argument is one of math. Let us say that the average business has a ridicules amount of tax liability of 25% of net profit. That means after you deduct for cost of doing business including employee salary, this means you have a net profit that you pay taxes on. For every $100,000 your company makes after expenses, you will only save $25,000 on taxes. They are not talking about eliminating business tax. Let us say you just 1/2 it. That means just to hire somebody at a decent wage of oh, $35,000 p/y. Don’t forget the business must pay their wage, payroll tax, and health benefits. In order to do that the company will have to make $300,000 net profit just to pay for one new employee. And then for how long?

Then there is the “bailout”. I keep hearing that if we don’t bailout the economy, employers won’t be able to pay their employees. I don’t know how much you understand about business. But as far as I can recon, if you have to borrow money every week to pay your employees, you need to rework your plan. If you are not making enough to pay your employees, then your business is on a solid road to failure. Either charge more for your product or service, or cancel your resort trip for your CEOs. Let us say that you have cornered the market on the production of Beta Max payers. You have a monopoly even. Yet you find your having to borrow money to pay your employees. You are going to need to look over your plan and find out why?

So if there is anybody out there who can explain to me how lowering taxes is supposed to increase employment, I would love to hear that one. I will buy the beer. Not the cheap stuff either.

1 comment:

Pink said...

Thank you so much for proving the fallacy of a link between lowering taxes and increasing jobs. The truth is that if companies were regulated more strongly so that they could not move their factories overseas as easily, we would have more jobs here. Republican support for corporations against labour unions and for "free" trade agreements has reduced the American worker to desperately hoping that he can make more than José or Miguel's $2.50/hour in Mexico - which is precisely the standard being imposed on them by auto corporations on the threat of lifting the factory entirely and shipping iut out to Mexico. This is why our unions had to settle for $10/hour and a slash in benefits. It is so sickening to see conservative support for nonsense policies like these while they point the finger at Democrats for not making jobs appear out of thin air. If corporations cannot be made to keep their facilities in the US, how can any Democrat pull jobs out of a hat? They are not magicians! (just some rambling rants)

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