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Weird Tax Myths

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MYTH #1: Tax cuts create jobs.
Tax increases cost jobs.
All Republican politicians, and many Democratic ones as well, make the claim that tax increases will prevent small business people from hiring. Indeed, it may force them to fire people.
Alright, we expect politicians to say loony things.
But we have a right to expect reporters to break out in hysterical laughter, economists to call their nearest media outlet to say how ridiculous that is, and competing politicians to explain why they're wrong.
That doesn't happen. And that's the weird part. Because it's pretty simple.
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Let's do some basic economics.
Real basic.
Taxes are not paid on revenue.
Taxes are paid on profits.
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Profits are revenues minus costs.
Labor is a cost.
Let's imagine a small business.
For the sake of simplicity, let's say it's a personal business, not a corporation.
It has gross revenues of $10,000,000 a year.

It has one hundred employees. They each make about the median income, around $35,000. That make the payroll $3,500,000 a year.

All it's other expenses come to $5,000,000. This includes all the materials to make whatever it sells, rent, maintenance, utilities, shipping, legal, accounting, etc., etc., and so forth.

That leaves a profit of $1,500,000 a year.

Let's look at a very high tax situation.

Imagine that taxes on everything over a million dollars a years is 90%. (The rate from WWII until 1964)

So, on the final half million of my profits, I have to give the government $450,000, leaving just $50,000.

If I add ten employees at $35,000 each, that costs me $350,000. Those are costs, deducted from revenues, decreasing profits.

Do I want to do that?

I would only have kept $35,000 of that $350,000 anyway.

You bet I want to do it. I get to add ten employees at a cost - to me - of just $35,000. Or $3,500 per employee.

I get more production, more territories, more sales. My business grows.

Indeed, the whole community benefits.

Let's look at a much lower tax situation.

Say 30% (just 1% lower than what we have now.)

We'll assume the same business, same employees, same costs and profits.

Let's say I'm approached by a factory in China. For simplicity's sake, let's say that even with shipping and other ancillary costs, I can cut fifty jobs and walk away with half their salaries as profits.
Fifty employees cost me $1,750,000. Half of that is $875,000.

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LARRY BEINHART is the author of SALVATION BOULEVARD, soon to be released as a major motion picture with Pierce Brosnan, Greg Kinnear, Jennifer Connelly, Marissa Tomei, Ed Harris, and Jim Gaffigan, WAG THE DOG, The Librarian, Fog Facts: Searching for Truth in the Land of Spin and HOW TO (more...)

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Tax cuts for workers, as opposed to business owner... by John Reed on Sunday, Dec 5, 2010 at 6:39:10 PM
Normally I don't reply to comments. However, this ... by larry beinhart on Sunday, Dec 5, 2010 at 9:55:29 PM
You contradict yourself. I agree that commodity pr... by John Reed on Sunday, Dec 5, 2010 at 11:58:59 PM
Those who are hired to work on those jobs, that ar... by John Sanchez Jr. on Monday, Dec 6, 2010 at 7:35:22 AM
Like I said, I am not against building an infrastr... by John Reed on Monday, Dec 6, 2010 at 8:33:27 AM
bringing manufacturing jobs back to these shores u... by John Sanchez Jr. on Monday, Dec 6, 2010 at 4:58:08 PM
You argue my point with the first half of your res... by John Reed on Wednesday, Dec 8, 2010 at 7:13:41 AM