Okay, on to Part 2.
Let's set up some ground rules. First, this, like the previous post, is not scientific. I always believe in backing what I say, or at least giving the reasons behind the opinions. That is what I'm doing with these two posts. My belief: raising taxes on millionaires is not good for creating jobs... my reasons: yesterday's and today's post. All dissenting opinions are always welcomed.
Secondly, as economics has taught me, using models, hypothetic situation analysis, heck, anecdotes, etc. in their simplest forms can help us look at a complicated situation in a simple way.
What is this about? This is the "how" behind what I believe. This is a small, simplistic, hypothetic micro-economic example. I certainly hope that it does not become a macro-level epidemic, but many macros make a micro.
With my hypothetic model, I'm establishing the givens:
- John Smith is the owner and CEO of LME LLC. ( I am keeping it as an LLC and not an INC to avoid the conversation of double/corporate taxes). If you're not familiar with LLCs, quickly - they are limited liability companies. Company's profits, in this case, the owner's income is treated as pass-through income and is simply reported as personal income (like a yearly earned salary) on a 1040 tax form.
- LME LLC has revenues of $2,000,000 per year.
- LME LLC's expenses are simple: 20 employees at $50,000 salary per year. For simplicity sake there are no additional costs, no employment taxes, health insurance paid, nothing. I'm just trying to keep it simple.
Without an extensive analysis we can see that LME LLC's income statement looks like:
So, let's add some taxes in there. Let's say John Smith's effective tax rate is 20% (yes... we know about marginal tax rates, and yes, he would be in the top 35% bracket, but his effective tax rate, after write-offs, mortgage interest deductions, etc. for this example, is 20%). With that, his take-home pay is $800,000. Simple enough.
Now, Obama gets his way and the "Buffett rule" (interestingly named after my boss) is enacted. This rule states that anyone earning $1,000,000 per year must pay at least 30% in taxes. Ceteris paribus (all other things equal)... the tax rate is the only thing that changes. With that, on his $1,000,000 income, John Smith now takes home $700,000 instead of $800,000. As you would guess, John Smith is not happy. Does the government really think he will say, "oh, sure, take $100,000 more of my money?" I don't. I think John Smith will do everything he can to retain his money.
What would John Smith do (again, reminder, this is NOT scientific and is NOT an absolute scenario)? In my opinion, John Smith, unhappy with the 12.5% pay cut, would try to maintain his lifestyle, and therefore, his $800,000 income. How would he do this? Well, quite simply (and the very crux of why I believe what I believe) he will cut three employees. You read that correctly.... he will cut three employees. Why three you ask? I think I know what you might be thinking. You might think, "but hey, he lost $100,000 in taxes, and that's only the salary of two employees... not three." Well, let's look at his new bottom line with a two-employee cut versus a three-employee cut.
First, the two-employee cut:
So, with the new 30% tax rate, what is John Smith's take-home pay? $770,000. Ugh. That's still a 3.75% pay cut relative to his $800,000 salary, and John Smith is not happy.
Now, let's take a look at the reason John Smith would cut three employees:
Again, with the new 30% tax rate, what is John Smith's new take-home pay? $805,000. He succeeded in not letting the tax hike affect him.
So, in my simple example, John Smith did everything he could do (with one type of expense, there was only one thing he could do), and 3 people lost their jobs. Yes, there will be other side effects, too. The remaining 17 employees will have to work harder, but they might buckle under the added stress as well. This could cause John Smith's business to shrink and his $2,000,000 revenue might drop. Who knows? That's going down another tangent. But yes, I do believe, as it is his right to do, John Smith will cut three employees.
At the end of the day, the already over-bloated government took in $100,000 money, and three people lost their jobs. How in the world is this good for the economy? As I stated as a side effect, John Smith's revenue might decline. Additionally, the three employees that lost their jobs lost their incomes. The businesses that they purchased goods and services from will see lower revenues. All in all, I don't see how a tax increase on millionaires, let alone anyone, would be good for the economy.
Yes, this was a simple example. I would be interested in your take. Am I wrong? Is there a way that tax increases would be good for the economy? Good for creating jobs? Share your opinions below. Thank you.
For additional analysis of how tax cuts benefit all, see: http://www.heritage.org/research/reports/2008/03/tax-cuts-not-the-clinton-tax-hike-produced-the-1990s-boom