Tax Hikes for Job Creators

From a report in today’s New York Post:

What Dems’ Tax Hikes Really Mean

…But who are those “wealthiest Americans”? Illinois businessman Wilson F. Hunt Jr. recently passed on to me the details of how his small business, which he owns with his wife, will be ensnared in this scheme to soak the rich.

Because his company elects to pay taxes as a Sub-chapter S Corporation, all the company’s profits are reported on the couple’s individual income tax returns as the sole shareholders in the company. They paid almost $1.1 million in taxes in 2010, yet the couple paid themselves only a combined salary of $189,000.

The rest of the income was put into retained earnings, which the company could then use to expand its business the following year.

We can’t raise taxes on them!  Otherwise, they’ll go out of business and not create any new jobs!  Well, maybe….

Let’s do the math:

  • The report doesn’t say whether the $1.1M in taxes is just in Federal income taxes or for all of their income taxes.  If the $1.1M refers to Federal taxes, it means that the business earned profits somewhere around $3.5M.  I don’t know the Illinois state tax rules, nor whether they had to pay local taxes that got included in the $1.1M figure.  As a worst case approximation, if their business were in New York City, their business would have to earn about $2.2M to pay $1.1M in taxes.  (Yes, taxes in NYC are that high.)  To keep the example simple, and be true to the author’s purported intent, I’ll assume that the Hunts paid $1.1M in Federal income taxes.
  • While the business earned, say, $3.5M, the taxes paid don’t give us a clue as to how much revenue it took in.  It could have been $5M or $500M.
  • The business could have spent that $3.5M on plant and equipment, or hiring additional employees, and paid less tax.  But the Hunts elected not to do that.
  • If the business had been a Subchapter C corporation, which pays taxes for itself, it would have similarly had to pay a little over $1M in Federal corporate taxes.
  • If the ‘Bush tax cuts’ expire through Congressional inaction, the Hunts will have to pay about $1.22M in taxes instead of $1.1M.  Yes, it’s $120,000 more, which is not a trivial sum, but their business can demonstrably afford it.

I’ll agree that the tax code really bites when it comes to retained earnings.  A business that saves its surplus to use in future years gets whomped.  It’s not how business is supposed to work: you’re supposed to borrow to expand your business, so that you can write off the interest.  (I find this particularly painful: the bank won’t lend my business 25 cents, so I have to finance everything out of the till.)

My point is that I find it very hard to believe the Republicans’ assertion that tweaking tax rates up–or down–will have a significant impact on employment.  There are no vast piles of jobs waiting in the wings to be deployed when tax rates drop 10 percent.

6 thoughts on “Tax Hikes for Job Creators”

  1. I live in Illinois and the taxes here are horrendous. We are desperately in debt so instead of cuts, our idiot governor decided to increase taxes on all businesses. The result? many went to NW Indiana which is still close to Chicago. Now there are less businesses so he’s deciding now to cut services. only he’s cutting the wrong groups, aka the disabled and elderly.

    My opinion on taxes are these, if a company is a small business they should pay less than a huge corporation. Also, I believe companies actively hiring in the USA should get tax breaks.

  2. I’m curious: how much were the tax increases?

    State taxes are a little different from Federal taxes in that one can more easily move to a different state than a different country. Nevertheless, relocating a business is a giant pain, and not something that one would casually do.

    Some politicians talk of cutting budgets, but nobody wants to do it in real life and take heat from aggrieved constituents–and public employee unions. So they cut the smallest agencies with the weakest constituencies first.

    As far as taxes, it’s worse than that. Nominally all businesses pay about the same Federal tax rates. But big businesses can redirect their money overseas and play other games to avoid taxes that aren’t worth the effort for smaller firms.

    The cost of hiring someone–wages, benefits, even the employer’s share of Social Security tax–is a fully deductible business expense. So in that sense there is already a ‘tax break.’ (But then, the cost of hiring someone in India is also a fully deductible business expense.) The Feds have made a couple of very feeble efforts to encourage hiring through further tax breaks, but the benefit has only been a few percent: not enough to make it worth the trouble.

  3. I’d have to look but I think the taxes were either 7% before or now. I just know when I heard about the tax increases I remember thinking great more companies will flee. Many are moving to Indiana and I don’t blame them at all. I think I look at this differently because I am less than a half hour from Indiana so if a company moves to NW Indiana it’s still close enough for me to work at, and in many cases even closer than before.

  4. NWP, didn’t personal income taxes double in Illinois a couple of years ago?

    It drives me nuts that people frequently confuse deductibility of expenses with credits to income tax. Suppose that a company (to include corporations) is taxed at 35%. Suppose that they don’t fill or eliminate a job that they would otherwise fill that has a fully burdened cost (Salary/wages and cost of benefits) of $60K per year. They “lose” $60K worth of deductions, which would save them $21000 on their taxes, but avoid an expense of $60K, putting them $39,000 ahead of where they would have been had they filled the job.

    Hiring fewer people and pushing them harder is great for profits.

  5. And if you lower corporate tax rates, then hiring fewer people and pushing them harder works even better: If the tax rate were lowered to 10%, the after-tax gain from dumping the $60k/year position would rise to $54k.

    I’ve sometimes wondered if the way to encourage hiring, contrary to all the popular wisdom, is to increase taxes.

  6. Yes Madness they did. I can’t remember how much but here in Illinois the taxes keep going up. My mom smokes and every year they keep taxing more and more for the Medicaid program. The sick irony is a large percentage of those on Medicaid are illegals and their kids and my mom is so sick of paying for them.

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