Bitter Political Rivalry Revisited, Medical Students Taught Empathy for Cadavers, and Russian Citizens Urged to Smoke and Drink More
Carter blames Kennedy for blocking health reform in ‘70s: “He did not want to see me have a major success in that realm of life.”
Humanizing medicine: “To expand clinical empathy, some medical-school instructors have students imagine the life of their cadaver and write about their feelings towards him or her.”
Study: “Large firms create as many new jobs as do small firms when age of the firm is accounted for.” This undermines the case for small business special treatment
Re: Russian taxes. This is why we aren’t going to eliminate tobacco in this country. Government is making too much money off of the habit.
One thing that is overlooked in the small firm/large firm debate is that companies almost never start out large. To get to be large you start out small and then grow. So if you have excessive burdens on small business you will stunt the growth of large businesses.
I find Carter’s claim a bit hard to believe. I remember Kennedy said he made a big mistake by not doing a deal with Nixon. but I don’t remember him saying that about Carter.
I have a hard time imagining what it would be like to write about my feelings toward a cadaver.
This would suggest targeting stimulus at new companies regardless of size, rather than small business. But it still remains to be shown whether the stimulus itself would result in new jobs.
For all we know, the older, more established companies are more apt to change hiring practices in response to stimuli. Newer companies may be hiring more, but may also be relatively insensitive to stimuli.
For another bit of devil’s advocacy, aren’t employee costs deductible against small business revenues, even when the business is owned by an individual? If so, then individual tax rates should have no direct bearing on decisions to hire. The only effect would be indirect, due to changes in business growth.
In fact, if the owner is currently working full time in his own shop, then a higher income tax rate might make it more attractive to hire a new employee to take over the owner’s hours.
Big businesses should be eligible for all the special breaks given small business. If something would kill small business without a special exemption then it shouldn’t happen.
Bart–say I have a small business. It has sales of $200,000 and after I pay for rent and an employee and phone and blah, blah, blah, I take home $70,000 for all the work and brain damage I go through. Say taxes eat up 20% and I’m a flow through company. That means I make $50,000 a year–enough to pay the mortgage, buy food, etc.
If you increase taxes, you reduce what I make. At some point my income from the business will be so low that I have to either fire the employee and do his work in order to maintain my standard of living, close the business down and go work for the the government, or retire and live off my savings, if any.
What increased taxes won’t do is make me hire another person which I might have done if I had enough to live comfortably on and wanted to purchase some more free time.
Linda– I didn’t mean to suggest that this would apply for all small businesses. A $70K taxable income is hardly in the Obamatax range anyway.
What I had in mind: suppose your business generates enough income to make it possible for you to consider semi-retiring or working reduced hours. If your marginal tax rate is the proposed 44%, and you can hire an employee who will be in the 28% bracket, it might be attractive to accept slightly lower net pay in return for much less work.
Sure, if you don’t have that flexibility then a tax increase simply amounts to a reduction in net income, i.e. a contraction of the business.
Bart–say I take home $250,000 after all employees have been paid. I’m rich by Obama standards. Of course I spent 20 years building the business so I have no retirement savings and I have hundreds of thousands in bank loans and leases that my house guarantees, but hey, I’m finally “rich.”
Let’s say my tax rate is 30% so I end up with $175,000. Obama raises my tax rate to 50%. I take home $125,000.
If I hire another employee that costs me $50,000 a year, I would take home $200,000. Under the high tax Obama scheme I get to keep and get to keep $100,000 or that. Under the lower tax scheme of 30% I take home $200,000 and get to keep $140,000.
The marginal tax rate faced by the employee has nothing to do with my business income.
Linda, your arithmetic is way off. Lets use your example, a business owner who has a sub s with a 250,000 a year profit. The proposed tax increase is an additional 3 or 4 percent on income not the revenue above 250,000 (its actually a little more complicated than that, there’s a tax rate from 175,000 to 370,00 and the top rate actually starts at about 370,000 year). Under the President’s proposal your taxes would remain the same. If you took home 350,000 a year in profit, the additional tax under Obama’s proposal is about the cost of two additional Starbucks Lattes a day. I don’t know about labor rates in Texas, but I’ll tell you $10 a day doesn’t go very far in NYC.
As for rich, that’s all relative. I may not think that 250,000 a year is very much, but the fact is that it puts you in the top 3%.
Oh, one more thing. The idea of the importance of small business may fall into the self mythology of our country, but the facts are quite the opposite. First, it’s not uniquely American, remember England is called a nation of shopkeepers, if you travel you’ll see lots of small business world wide. It’s contribution to the economy isn’t justified by the statistics. It may hire alot, but it also fires alot. It’s highly overrated. You should read Scott Shane’s “The Illusions of Entrepreneurship”
I never said it did. But the higher tax rate decreases the effective cost of hiring a new employee, thereby decreasing the effective cost of added leisure for the business owner.
In your example, under the lower tax scheme the new employee would cost you ($175,000 – 140,000) = $35,000. With the tax hike, it’s ($125,000 – 100,000) = $25,000 (all your figures). That’s effectively a 28% reduction in the cost of labor! Unless you either really need the money, or unless you really enjoy doing the work yourself, why wouldn’t this make you consider delegating your work to an employee?
Of course, in the long run this leaves less money to be plowed back into the business, which would reduce future hiring. But nobody seems to care about the long run these days.
I have trouble with your example because it seems to apply a marginal tax rate to the entire income. That’s why I was trying to express the incentives in terms of a change to net income. Also, I was trying to avoid assumptions about how much of the owner’s income would be considered return on investment rather than compensation for work.
I agree the employee’s marginal tax rate doesn’t matter, at least not directly. But if you were to assume that a qualified employee will expect the same after-tax compensation as the owner for performing identical work, then the employee’s overall tax rate would matter. Assuming the owner remains in the top bracket either way, the correct comparison would then be between the employee’s overall rate vs. the owner’s marginal rate.
Suppose you value the time you put into your business at $30,000. Under the lower tax scheme, your after-tax wage is $35,000 (the remaining $105,000 is either return on investment or compensation for work you can’t delegate). At $35,000, it’s worth continuing to work.
Under the higher tax scheme, you only earn $25,000 on the time you put in. This is less than the $30,000 value you put on your time, so you’re better off hiring someone.
they don’t want small businesses they want businesses that don’t make any money.
Bart–
You originally said “In fact, if the owner is currently working full time in his own shop, then a higher income tax rate might make it more attractive to hire a new employee to take over the owner’s hours.”
The return to the entrepreneur is after the cost of the additional employee is netted out. The new employee costs me $50,000 under both tax rates. The difference is that if Obama takes more the business owner gets to keep less as a reward for his time and effort. I still do not understand how getting to keep less will encourage someone to incur the brain damage of an additional employee.
Linda, per your example, you had two scenarios:
1) 30% tax rate: Your net without the employee is $175,000. With the employee it’s $140,000. Cost of the employee (net of all taxes, including employee’s payroll and your income tax) is $35,000.
2) 50% tax rate: Your net without the employee is $125,000. With the employee: $100,000. Net cost of the employee is $25,000.
So the net cost of the employee is less under the higher tax rate.
The employee would presumably take over work you are currently performing yourself. If the value you place on the added leisure time is greater than $25,000 and less than $35,000, it makes sense to hire the employee under the higher tax regime but not under the lower tax rate.