WILL “Job Creators” Really Not Hire If They Have To Pay Taxes?

House Speaker Boehner and Senate Minority leader each claimed this week that higher taxes on the wealthy will cause the “job creators” to cut jobs and “hurt growth.” The Heritage Foundation makes specific claims about how this will happen. Let’s take a look.

The Heritage Claim

The Heritage Foundation purchased a Twitter promotion that shows up if you look for the hashtag #my2k, which President Obama has asked people to use when tweeting about the $2,000 he claims the average middle-class person will pay in additional taxes if the portion of the Bush tax cuts that was for people below $250K expire. (Note – almost all of that will be paid by people approaching that $250K top end. Regular middle-class people won’t pay anywhere near $2k in additional taxes.)
Heritage’s Twitter promotion sends people to a Heritage post, 4 Reasons Warren Buffett Is Wrong on Tax Hikes. Heritage trots out the old “job creators” myth, saying wealthy people are the people who “create jobs” with their money, and won’t hire people if they have to pay taxes. Here is one of Heritage’s 4 claims:

According to Treasury figures, 1.2 million Americans who employ people are paying their taxes through the individual income tax, and they would be hit head-on. The amount that their taxes would go up could be roughly equivalent to one employee’s salary, meaning that’s one person they can’t hire in the new year.

I heard about Heritage’s claims from several major sources including Marketplace and the Newshour (repeated to their audiences without examining whether it made sense.) So I think it is worth examining.

Let’s Dig Into This Claim

Let’s take a closer look at this claim that the average “small businessperson” will not hire one person because of the additional tax.
Let’s say the potential employee’s salary is $25,000. If the Bush tax cuts expire the top rate goes up by 4.6% on income above $250K (after all deductions.) $25,000 is 4.6% of about $544,000. So the Heritage claim is that a businessperson who has an income from their business — after all personal deductions — of about $794,000 ($250,000 plus the 544,000 on which the additional tax would apply) “can’t” hire a needed person.
(If the potential employee would have made more, this employer’s taxable income rises if the tax means the employer won’t hire someone. If the employee that can’t be hired makes $30,000 the employer has to have an income of $902,000 to pay that much additional tax.)

The Problems With The Claim

This claim relies on the reader not understanding how these taxes are calculated, why business hire and fire and how businesses make profits. Heritage bases the claim on the idea that a business-owner cold not hire someone they needed to make them around $800-900,000 after all deductions.
Businesses want to keep costs down and that means they don’t hire people unless they really, really need to. They hire people when doing so will make them more money, they lay people off when it will save them money. Employees are only hired or kept on the payroll if they are needed, and not hiring one necessary person would therefore hurt the business that was successful enough for the owner to make at least $794,000 after all deductions.
So assuming the business owner knew what he or she was doing, and only had the number of employees that were needed, the following year the business would do worse without that needed employee, and the owner would make less. Would an employer really do this? Of course not.
Let me ask another question. How come every time I closely examine a conservative economic claim it falls apart, and was really about fooling people into giving more money to rich people, not making things better for all of us?

This post originally appeared at Campaign for America’s Future (CAF) at their Blog for OurFuture. I am a Fellow with CAF.
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