Wednesday, April 13, 2011

What Lowering Taxes Won't Do

This is a quote this morning from a politician in response to questions about the rationale behind lowering taxes:

"I am a small business owner myself, and I can tell you that if we have less taxes and were able to put more in into our business, we can hire more workers."

Just so we are on the same page, businesses don't hire people because they have more cash. They hire people when they need to increase capacity. Capacity is determined by the potential for demand. Okay, I see some blank stares in the crowd, so let's look at it a different way.

I am a small business owner, selling $5 milkshakes. Let's say my taxes go down by 50%, so now I can keep more of my profits. You, the customer, still have the same amount of money, along with price increases in gas, food, and other things. So, you buy the same amount of milkshakes from me that you normally do - 1 a month. So, my demand hasn't really gone up any, but I have all this "NEW CASH". So, here are a few options for my cheddar.

  1. Hire a new person to sit around and give me new headaches
  2. Buy a new milkshake machine that does the job of two workers
  3. Buy a new foreign car
  4. Take advantage of low prices from excess capacity in some other industry, like travel and foreclosed homes
  5. Invest my savings with the guys on Wall Street

Tough choices right? If you are still stuck, number one is probably not going to happen, unless (1) there is demand to justify the increase in capacity, (2) it is a wasteful and inefficient operation, or (3) your wages are so low that it's no skin off your back.

Essentially, lowering taxes only means that government needs less to do its job. The disabled person in need of services and the fact that you need to hire a new person to handle "all the new work" have nothing to do with each other. In this same interview, the politician said that several business owners are unwilling to hire new people because of what's going on in Washington. Now think about that for a moment. You have demand, and you've maxed out capacity, but the situation in Washington is forcing you to walk away from new revenue. Really?

I remember a friend once complaining about their spouse not working, but spending all the money. I recommended influencing the spouse to work to cover some of the expenses. The response, "the taxes would kill us". So let me get this straight. If I make $150,000 a year, with taxes in excess of 35%, and my spouse gets a job to make $24k a year, I go in the hole for the effort. There's not even an increase of $1 in my household. It made no sense, and this makes no sense. When the line gets long at the milkshake stand, trust me, I will be hiring more people. 

That's it class, place your excuses on my desk when you leave.

By the way, I called for a Fed Funds rate increase to 8%, in 2006.

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