Why the GOP are LYING When They Say Increased Taxation Hurting Small Business's Ability to Hire More People

Let's do a little math. What actually happens to the bottom line if you increase a business's taxation rates - once you take into account employee costs.
Sure, you might not have as much money in the bank - as a business owner - at the end of the day, but that money in the bank is AFTER you've paid for your employees, period.
Here's how it works. Let's define a few terms first.
Revenue - Employee Salaries, Operating Costs, Depreciation, Etc = Gross Profit
Income Tax = Gross Profit * Tax-Rate
Net Profit = Gross Profit - Income Tax
Note that the Tax part happens after the Gross Profit calculation is made.
Say I have a $500,000 a year business. I have 5 employees. They each make $40,000 a year. With employer contributions to SocSec & Federal Income Tax, they cost me (not including health insurance, unemployment insurance, etc) $43,000 a year.
Total cost: $215,000.
Now, not including rent on the building, etc. That means that if I bring in $500,000 a year, my
Gross Profit is 500000-215000 = $285000.
Tax on this - let's say it's 18% (not necessarily accurate but there you go)... $51,300.
Net Profit: $233700.
Now, let's hire another employee. This takes my costs from $215,000 to $258,000. Assuming that we have a bad year, and don't make more income, I get:
500,000-258000 = $242000 in profit.
Tax on this at 18% is $43,560. Hey waitaminute! I paid less in taxes for hiring an extra employee... how is that possible?
OK, so what's my gross? $198,440.
How much less than last year is this? $35,260.
Wait a minute... This is insane.
That employee cost me $43,000 this year. But I didn't make any more money, and they only cost me $35,260 from my take home pay?
Yes! Because they are a loss, I get an 18% discount on the cost of them. The government actually subsidizes them as a cost to me. It's a zero sum game.
If I pay 36% income tax, and I'm getting income from my business, I get each employee at a 36% discount.
I don't believe the small business arguments to be honest. If you're small enough that you're making a huge loss, you won't be taxed on it anyway. And in some cases, you can carry that loss year-on-year.
Now, if you feel like arguing whether businesses should be allowed to rollover money into expansion instead of paying taxes as the revenue comes in, I would totally love to see that happen - but only for small business. Large businesses already take advantages of other, larger breaks.
Point being, that the GOP claiming that increasing taxes on people earning > $250,000 will stop them from employing people is a canard. It doesn't stop them from earning a profit. The slope of the line is still positive; it's just not going up as steeply. If the line goes negative, they already lay people off anyway - but changing tax rates is NOT going to help that slope. In businesses in dire straits, it may even help with writeoffs. Remember: we're not talking operating capital here - just profit. Pure profit.
Some proof:
Using a friend's figures (a business with employees who cost $50,000, making a net profit of $50,000 a year), I added a tax rate (total, not marginal) of 18%.

Base Scenario
Gross Revenue $360,976
Employees 6
Employee salary $50,000
Total employee cost $300,000
Gross Margin $60,976
Tax 18% $10,975.68
Net Profit $50,000.32
... and here's what happens if they hire one more person:
Hire One more Person, Everything Else (including Revenue) Static:
Gross Revenue $360,976
Employees 7
Employee salary $50,000
Total employee cost $350,000
Gross Margin $10,976
Tax 18% $1,975.68
Net Profit $9,000.32
... OK, so let's see what happens if we nearly DOUBLE their effective taxation. Note: This scenario never happens in real life; marginal tax brackets don't work that way. Even at 1950's rates, until you're earning in the trillions, your effective total taxation never hits more than about 36% - even if you're well in that 90% bracket.
I chose 34% because that's what my friend had in his scenario; that's what I needed to up the tax rate to for the net profit to drop from $50,000 to $40,000, so that he'd be short by $10,000 and wouldn't be able to hire an extra employee.

Increased Taxation - to 34%
Gross Revenue $360,976
Employees 6
Employee salary $50,000
Total employee cost $300,000
Gross Margin $60,976
Tax 34% $20,731.84
Net Profit $40,244.16
Now, let's see what happens when I up the employee count, and hire one more guy at the same salary.
Hire One More Person We Allegedly Can't Afford
Gross Revenue $360,976
Employees 7
Employee salary $50,000
Total employee cost $350,000
Gross Margin $10,976
Tax 34% $3,731.84
Net Profit +$7,244.16
Hey. Wow. I shoudn't have been able to afford that person. It should have put me in the red. But apparently not. Isn't that odd?
OK, let's say we hire even more people, and run at a loss. Hire 8 people? You're in a worse position in terms of losses in the 18% bracket than the 34% one.
By the way, it's probably no coincidence that it's a lot less palatable to claim "but I'll be personally making less money" than to say "but I won't be able to hire people - look at all those unemployed people you'll be hurting". It sounds like altruism, but it's really not.
In short, the GOP are lying to you.
Boehner: Lying through his teeth on the cost to business of taxation.
It is true, however, that employee salaries are the biggest revenue sink in any company. My recommendation if you can do more with less is to lay off your staff and work the rest to death. The savings will dwarf any changes in taxation to your bottom line - until the remaining people quit. Some might say, in fact, that this is how businesses have run things in this country for years now... Perhaps that's why wages have stagnated? Solely to maximize investor return?

Now, don't get me wrong, businesses need capital. But small businesses typically aren't funded by huge investments from wealthy investors, or venture capital firms. They're funded by the friends and families of the people who start it. They're funded by angel investors - who when they hit it big, hit REALLY big (but that happens a tiny percentage of the time - the rest, the company folds, and the investors take a loss on their tax return).
By the point where the company is turning a profit, we're in the land of great problems to have. Higher taxes? Not a problem. It's a problem I'd love to have.
Simon Cooke has built budgets and developed project staffing and hiring plans as business development manager and technical director for small businesses in the video game industry in a professional capacity, on projects ranging from $300,000 to $14,000,000. Today, he works as a tech ninja for a large business, until the economy recovers enough to start his own entertainment company.
About the author

Simon Cooke is an occasional video game developer, ex-freelance journalist, screenwriter, film-maker, musician, and software engineer in Seattle, WA.

The views posted on this blog are his and his alone, and have no relation to anything he's working on, his employer, or anything else and are not an official statement of any kind by them (and barely even one by him most of the time).

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