More Evidence That Tax Cuts Are Needed to Stimulate Hiring

I shared a month ago Arthur Laffer’s idea that a tax holiday would have cost less than the government’s budget-busting stimulus programs and would have already achieved an unemployment rate of 2.5%. Instead, the US faces bankruptcy thanks to a crescendo of mindless spending following decades of fiscal mismanagement in Washington, and still suffers an officially reported unemployment rate of 9.5% and an actual unemployment rate of 16.5%. See the July 12 article here.

Last week, a small business owner in New Jersey named Michael Fleischer provided further evidence of how government tax policies are killing job creation. He wrote in a Wall Street Journal opinion piece:

When you add it all up, it costs $74,000 to put $44,000 in [my employee] Sally’s pocket and to give her $12,000 in benefits. Bottom line: Governments impose a 33% surtax on Sally’s job each year.

Because my company has been conscripted by the government and forced to serve as a tax collector, we have lost control of a big chunk of our cost structure. Tax increases, whether cloaked as changes in unemployment or disability insurance, Medicare increases or in any other form can dramatically alter our financial situation. With government spending and deficits growing as fast as they have been, you know that more tax increases are coming — for my company, and even for Sally too.

Companies have also been pressed into serving as providers of health insurance. In a saner world, health insurance would be something that individuals buy for themselves and their families, just as they do with auto insurance. Now, adding to the insanity, there is ObamaCare.

Every year, we negotiate a renewal to our health coverage. This year, our provider demanded a 28% increase in premiums — for a lesser plan. This is in part a tax increase that the federal government has co-opted insurance providers to collect. We had never faced an increase anywhere near this large; in each of the last two years, the increase was under 10%.

To offset tax increases and steepening rises in health-insurance premiums, my company needs sustainably higher profits and sales — something unlikely in this “summer of recovery.” We can’t pass the additional costs onto our customers, because the market is too tight and we’d lose sales. Only governments can raise prices repeatedly and pretend there will be no consequences.

And even if the economic outlook were more encouraging, increasing revenues is always uncertain and expensive. As much as I might want to hire new salespeople, engineers and marketing staff in an effort to grow, I would be increasing my company’s vulnerability to government decisions to raise taxes, to policies that make health insurance more expensive, and to the difficulties of this economic environment.

A life in business is filled with uncertainties, but I can be quite sure that every time I hire someone my obligations to the government go up. From where I sit, the government’s message is unmistakable: Creating a new job carries a punishing price.

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  1. Chris Burns
    Posted September 10, 2010 at 8:30 am | Permalink

    I can’t help but notice a sleight-of-hand here in this discussion (and most others like it in the print and broadcast media). Arthur Laffer and supply-siders in general focus all or most of their animosity on progressive income taxes, capital gains taxes, and estate taxes. However, when we actually start talking about the effect of taxation on an employer’s calculus as to whether to hire or not, the only taxes that actually matter are payroll taxes, FICA taxes, and other miscellaneous taxes related to social insurance programs. These two sets are almost entirely disjoint. I conclude that the prescriptions offered by Laffer & Co. do not at all follow from the economic argument they have made in order to win public support.

    Cutting a sole proprietor’s marginal personal income tax rate literally does nothing to encourage him to hire a new employee. In fact, if anything, it discourages him from plowing revenue back into his business, as this reduces taxable income, of which he now keeps a larger fraction for his enjoyment. A lower marginal income tax can only encourage business owners to take more money home, since it slowly turns the business into a cash flow machine rather than an appreciating asset. The cost of investment in the business (hiring, expansion, etc) relative to the benefits of taking the money home now increases when income taxes are low.

    So, why even consider lowering income taxes if the goal is economic stimulus? Almost anything else is likely to provide more effective stimulus, and economists tend to agree.

    The answer is that supply-side ideologues are wedded to the goal of lowering government revenue as an end, not as a means to any particular end. The idea that economic stimulus can be achieved through this is just after-the-fact rationalization, and is entirely disingenuous. They have a hammer which they are extremely fond of (and for reasons the average person is not inclined to think rational), and so every problem quickly begins to resemble a nail.

  2. Steve
    Posted August 20, 2010 at 3:22 pm | Permalink

    Jason, I’d be operating in the vigor of incapacity were I to fully engage this issue with you.
    It’s been a long time since I took a class in modal logic and a long time since I made up my mind that Ronald Reagan’s fiscal fiasco strafed the American economy to full detriment.

    MJ, in my opinion, intended to make just one point; lousy management is no excuse for a reduction in tax burden and haven’t we had our share of the former? And I’ve witnessed enough managerial incompetence at the ‘small business’ level to consider it the norm rather than the exception. Yes, I’m aware….logical fallacy.

    I want to thank you for responding in depth. I view it as a gift and consider your opinion nothing short of ‘essential’.


    • Posted August 22, 2010 at 5:08 pm | Permalink

      My pleasure, Steve. I appreciate your taking time to share your opinions here.

  3. Steve
    Posted August 20, 2010 at 6:27 am | Permalink

    Fairly concrete rebuttal and the facts check out as well at

    • Posted August 20, 2010 at 1:34 pm | Permalink

      Thanks, Steve.

      Mother Jones is always good for a counterpoint to most business angles, and the article you linked is no exception. However, it doesn’t nullify Fleischer’s main point that the biggest impediment to small-business hiring now is burdensome taxes, which is important to consider when the government is spending enormous sums precisely to stimulate hiring. As Arthur Laffer pointed out, it would be cheaper and more effective to collect less tax revenue from business than to spend the tax revenue collected on toothless stimulus.

      The MJ article makes three points:

      • Paying taxes is nothing new, especially for employers, and the “burdened cost” of employing somebody has always been “higher than the number on the offer letter.” For middle-income employees, it’s about 50% higher.
      • The writer of the article, Michael Fleischer, is the brother of Ari Fleischer, George Bush’s former press secretary. Therefore, he carries inherent animosity toward the Obama administration, the president being a Democrat and all.
      • Michael Fleischer is a bad business manager, and the poor health of his company is the actual reason he can’t hire new employees. According to a reader of Outside the Beltway, “Mr. Fleischer should spend less time complaining about taxes and more time thinking about how he can correct 10 years of mismanagement.”

      My thoughts per point:

      • Just because taxes have been with us forever, doesn’t mean that a temporary reprieve of them would be meaningless. It makes sense that any business would be more inclined to hire people if it was cheaper to do so, even if temporarily. Keeping taxes at zero or unreasonably low forever is not good, but a temporary reprieve would be great. It’s how Reagan put America back to work in the 1980s. It would cause more damage to the deficit in the short run and postpone tackling the debt, but those are different discussions. As for how to get Americans working again, a short-term business tax reprieve is tough to beat.
      • Who care’s about Fleischer’s political leanings? Let’s stick to evaluating the merits of his article. This type of identity politics, wherein we refuse to hear somebody’s ideas merely because of their party affiliation, is one reason we make so little progress.
      • The problems facing Fleischer’s business beyond the cost of hiring new employees is irrelevant. He might be a bad business manager, he might be operating in the wrong industry, he might fail regardless of where tax policy goes. Nonetheless, he makes a valid case that any business seeking to hire somebody now — Fleischer’s or not — faces an enormous tax burden. Temporarily lifting that tax burden would make the hiring of new people less expensive and, thus, more appealing.

      All in all, I disagree with you, Steve. I do not think the MJ article provides a “fairly concrete rebuttal” to the idea that a temporary business tax reprieve would do more to encourage small-business hiring than has the government’s monumentally expensive stimulus spending.

  4. Posted August 17, 2010 at 11:43 pm | Permalink

    Yes, it’s very bad. Even though economists have been saying for the past three years that the US is different from Japan so Japan does not serve as a reasonable precedent, the US is following Japan’s script almost to the letter. Take it from me, somebody who’s lived in Japan for more than eight years, when a recession lasts long enough people stop calling it a recession and just call it the economy. The growth that was once taken for granted becomes a thing of legend, something that grandparents and parents tell younger generations about. Nobody in Japan expects the economy to ever really recover, and not a soul owns a single share of stock. The stock market has simply exited the list of reasonable asset classes for financial planning.

    Be on guard for all kinds of nuttiness. One way that the US is different from Japan is that it maintains the world’s biggest military. That card could well be played in a real war, not a meaningless diversion in some backwater that serves only to pad the bank accounts of defense contractors, but a real war like the one that got us out of the Great Depression. For more on that, see my July 2 article.

  5. Daniel
    Posted August 17, 2010 at 11:24 pm | Permalink

    The lack of economy-related knowledge in this administration has been simply astounding. It becomes more and more scary as it becomes clearer that we’re slipping into a second recession. This, while those in Washington continue to shout from the hills that all is Ok and we’re experiencing an economic recovery. I must say I’m beginning to agree with you that the situation in the U.S. is extremely dire – and we may well have dug ourselves a hole which we won’t be climbing out of.

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