Explain the Higher Tax = Layoffs Argument to Me

[yllus]

Since most people don't run businesses and are generally stupid (as exemplified in this thread), they don't understand that many companies re-invest after tax income in order to maintain and/or grow their business. Let me illustrate with an example. Let's say a company has $10 million in "income" and after tax they are left with $6 million. In order to maintain and grow the business, assume the company has budgeted to spend $5 million in equipment and services, and the remaining $1 million to be passed to the owners as a dividend.

Assume there is a tax increase, where now the after tax cash flow they are left with is $5 million. They still need to spend $5 million in order to keep the ship running and moving, and the owners require the $1 million in maintain their yachts and vacations. What do you think management is going to do in order to find the additional $1 million? It will be a combination of reductions in headcount (lay offs), savings in expenses and reduction in the planned $5 million capital expenditure spend.

Hopefully this helps open up your mind a little bit. Or you can continue your class warfare populist rabble.

There's a practical limit to how many employees the owners can fire. If the owners of this company have 250 employees, they might cut their outgoing sales force from 30 to 10 heads to bring back that $1 million in savings. They'll probably cut the lesser performers and may mostly retain their sales, but there will be a difference. Add to that the fact that most bosses hate firing people because of how it makes them feel personally and for what it does to company morale, and layoffs end up rarely being the first choice for dealing with tax increases.

Price increases are what I've seen happen first, as is simply eating the loss in profits and cutting back on office catered lunches / flights / paid conferences / Christmas parties.

All that said, I think a large majority of economic evidence says that an extremely low/non-existent corporate tax, a mid-sized income tax and substantial consumption and property taxes are the way to go. Not damn likely we'll see that anytime soon.

 

[Craig234]

You missed everything I said. Raising taxes requires companies to react as to not loose profit margins. The most likely reaction is to cut labor costs but its not always the case. Some go out of their way before making this decision while others can do little else before throwing axes. Labor costs are one of the only costs they have control over and also are one of the biggest costs as well. Hence why this is the likely choice.

Let's say a company has revenue of $11 million and profit of $1 million.

Let's say the tax rate is 5%, and salaries are $6 million.

So, the company pays 5% of $1 million in taxes, or $50,000.

No, let's say I'm President and the tax rate is raised to 50%. With those same numbers, their tax payment would go to 50% of $1 million, or $500,000.

Now, what changed about employees? They still make the same $6 million. Zero of that is still taxed. The same issues apply to how many people I benefit from.

Nothing changed about the employees. So paying them less to 'make up for' the taxes makes no sense. Whatever I pay them less at best increases profits above $1 million, which INCREASES my taxes. More likely, the cost of cutting their income - they quit and leave for competitors, or just quit and leave needed functions without staff - exceed any benefit. Now, if they're overpaid and can be reduced, that's the case regardless of the tax rate. The tax rate doesn't change that.

In fact, the 5% tax rate tells me, 'take money out of the company as profit; you get to keep 95%!' But the 50% tax rate says, 'may as well reinvest the money in the company - better to grow the company than lose half the money to taxes by taking them as profit.'

And in fact, that's that history shows us - the economy did quite nicely with far high tax rates.

But some people (cough, you) fall for the propaganda by the rich. "Don't tax the job creators!" You are supporting anti-employment policies to benefit the rich.

 

[momeNt]

That's right. It's even more right because employees are paid with untaxed dollars.

If he hires a person, the money he pays them is a business expense - it's deducted from his revenues that are taxed, so he pays no more taxes by hiring someone, even if the rates are high - and actually, it's the opposite: the higher the tax rate, the more incented the business is to reinvest its revenue in the business, instead of taking it out as profit. That's GOOD for the economy.

High taxes are like a tax incentive for hiring and investing in the business.

The people arguing the opposite are only trying to shift taxes off themselves.

Higher taxes creates an incentive to bloat up the income statement before income taxes correct, or find interesting accounting tricks to make your business show no profit. All those commitments to lower your earnings before taxes happen before the revenue is realized though.

So your essentially posing a nicely worded argument to show that taxes actually create jobs, but you leave out the fact that businesses would have to behave in a manner that is extremely risky in order to avoid those taxes and have them actually work as a proper incentive.

 

[Fern]

If the money is invested in the business, how is it profit?

Increase tax -> business is more likely to reinvest revenue since they gain less when it's taxed as profit?

Somewhat true, however you are operating under the erroneous belief all business investment is an immediate write-off, thus reducing taxes.

Examples:

If a business expanded, or simply thought it better to own their own location instead of renting, and bought land and constructed a building last year. The business bought land for $500K, and constructed a building/plant for $500k.

Now how much is deductible?

Of the $500K for land - zero. None.

Of the $500K for the building - about $13K.

So, they invested $1M and get to write off $13K. That's $987,000 they still pay tax on but after investing have zero left over to pay tax with.

While you may have a fairly simple business, in most cases the net income reported has little relationship to cash flow.

Fern

 

[Craig234]

Somewhat true, however you are operating under the erroneous belief all business investment is an immediate write-off, thus reducing taxes.

Examples:

If a business expanded, or simply thought it better to own their own location instead of renting, and bought land and constructed a building last year. The business bought land for $500K, and constructed a building/plant for $500k.

Now how much is deductible?

Of the $500K for land - zero. None.

Of the $500K for the building - about $13K.

So, they invested $1M and get to write off $13K. That's $987,000 they still pay tax on but after investing have zero left over to pay tax with.

While you may have a fairly simple business, in most cases the net income reported has little relationship to cash flow.

Fern

Salaries - the topic here - are 100% written off that year.

The investments you mention give write-offs over many years.

That $1 million spent isn't 'new taxable income'; if they didn't invest it and took it as profit, they'd still owe taxes on it with no write-off.

 

[Fern]

Explain the Higher Tax = Layoffs Argument to Me

Here's your answer:

My uncle runs a restaurant. Here's how he explains it. Taxes determine whether or not he takes an extra vacation to the bahamas, it doesn't determine whether he hires an employee or lays one off. The ONLY metric he uses to determine hiring/firing is if there is increased/decreased demand for his product.
-snip-

Increased taxes take money out of the economy. Raising everyone's taxes means less for available to spend at the restaurant, or less demand. Small businesses such as Phocus's uncle get screwed.

Again, the money that is taxed doesn't suddenly disappear out of the economy, it is recirculated back into the economy. The posts from some of you people are becoming more and more bizarre.

But it's gone from being circulated to everyone, to being circulated by Uncle Sam. That hurts everyone but those existing on the govt food chain.

snip-
Does the guy who works for the FBI take vacations and eat at my uncle's restaurant? Does the guy who does construction on bridges take vacations and eat at my uncle's restaurant?

Probably not. The majority of our population or businesses don't see any benefit to govt spending. Not many business rely, to any extent, on any money spent by Uncle Sam.

Notice how all over the US the economy sucks, except for Washington DC?

Fern

 

[xBiffx]

Let's say a company has revenue of $11 million and profit of $1 million.

Let's say the tax rate is 5%, and salaries are $6 million.

So, the company pays 5% of $1 million in taxes, or $50,000.

No, let's say I'm President and the tax rate is raised to 50%. With those same numbers, their tax payment would go to 50% of $1 million, or $500,000.

Now, what changed about employees? They still make the same $6 million. Zero of that is still taxed. The same issues apply to how many people I benefit from.

Nothing changed about the employees. So paying them less to 'make up for' the taxes makes no sense. Whatever I pay them less at best increases profits above $1 million, which INCREASES my taxes. More likely, the cost of cutting their income - they quit and leave for competitors, or just quit and leave needed functions without staff - exceed any benefit. Now, if they're overpaid and can be reduced, that's the case regardless of the tax rate. The tax rate doesn't change that.

In fact, the 5% tax rate tells me, 'take money out of the company as profit; you get to keep 95%!' But the 50% tax rate says, 'may as well reinvest the money in the company - better to grow the company than lose half the money to taxes by taking them as profit.'

And in fact, that's that history shows us - the economy did quite nicely with far high tax rates.

But some people (cough, you) fall for the propaganda by the rich. "Don't tax the job creators!" You are supporting anti-employment policies to benefit the rich.

If you cut that $6 million by laying off employees, you can makeup that $500,000. I didn't say anything about paying less, I said, not hiring or axing. It's either do this or raise prices which happens too or a combination of both.

 

[Craig234]

If you cut that $6 million by laying off employees, you can makeup that $500,000. I didn't say anything about paying less, I said, not hiring or axing. It's either do this or raise prices which happens too or a combination of both.

Not really. On average, employees return more than $1 per $1 spent (or else businesses wouldn't have them).

So cutting $500,000 in salaries could be expected to cut more than $500,000 in income, which doesn't 'make up for that $500,000'.

But you missed the point, a higher tax rate INCENTS employment.

 

[Craig234]

Increased taxes take money out of the economy.

No, they don't.

Contrary to Fox News reports, the government actually burns very few dollars.

The money is actually put back into the economy, in all those things the government spends on (and spend it does, as you should agree).

So the tax money stays in the economy. Out from one person, in to another.

 

[Fern]

Salaries - the topic here - are 100% written off that year.

The investments you mention give write-offs over many years.

That $1 million spent isn't 'new taxable income'; if they didn't invest it and took it as profit, they'd still owe taxes on it with no write-off.

You miss the point.

#1. In my example that company has to pay income tax of $355,450 on money they don't have (it was invested). If they planned on one tax rate, but you then change it/increase it how do they handle that?

#2. The company in my example, if they took out a loan, will be paying the mortgage for 15-20 yrs. Principal payments are nondeductible. You raise taxes, and you are taxing money they don't have (their taxable income is higher than cash flow because principal payments are not deducted on P&L ). If taxes are raised something has to be cut; you can't just not make mortgage payments. But as has been pointed, you can control labor costs, and you may be forced to cut it to pay increased taxes.

Too many here are operating under simplistic assumptions. The relationship between finances/cash flow/taxes are more complicated. There are many many things that work to distort the relationship between profit and cash flow; it's a rare coincidence (or simple business) that has net cash flow = profit. You can really find yourself in bad situation if unplanned tax increases hit you during a period when you have substantial nondeductible payments. This is an example of 'uncertainty' that cause businesses to be careful and hoard cash.

Fern

 

[Fern]

Originally Posted by Fern View Post
Increased taxes take money out of the economy.

No, they don't.

Yes it does. It takes in of one 'economy' and puts it in another one. I adequately explained that above, but that didn't deter you from attempting an irrelevant cheap shot at Fox.

The money is actually put back into the economy, in all those things the government spends on (and spend it does, as you should agree).

So the tax money stays in the economy. Out from one person, in to another.

Yes, put back somewhere else.

For the vast majority of small business a general tax increase takes money from our customers and clients and puts in another economic loop, one we don't benefit at all.

Fern

 

[dmcowen674]

Is this guy one of the Republican posters on here?

He sounds like them.

9-20-2011

http://news.yahoo.com/blogs/ticket/rep-john-fleming-field-criticism-over-600k-income-153305241.html

Rep. John Fleming fields criticism over 600K income


During an MSNBC interview to discuss why Fleming opposes President Obama's tax increase on those earning more than $1 million per year, host Chris Jansing said that Fleming has an income of more than $6 million. Fleming quickly corrected her, saying he actually takes in a fraction of that gross amount--about $600,000.

"The amount that I have to reinvest in my business and feed my family is more like $600,000 of that $6.3 million," Fleming explained. "So by the time I feed my family I have, maybe, $400,000 left over to invest in new locations, upgrade my locations, buy more equipment."

Fleming owns a string of Subway sandwich shops and UPS store franchises that earned a gross income of about $6.3 million last year


Jansing went on to tell Fleming that his annual personal income of $200,000 from those ventures was "not exactly a sympathetic position" from which to make the case for lower taxes on the wealthy.


"You do understand, congressman, that the average person out there who's making maybe 40, 50, $60,000 out there, when they hear you only have $400,000 left over, it's not exactly a sympathetic position," she said. "You understand that?"


"Class warfare's never created a job," Fleming responded. "And that's people that will not get jobs. This is all about creating jobs, Chris, this is not about attacking people who make certain incomes. You know in this country, most people feel that being successful in their business is a virtue, not a vice, and once we begin to identify it as a vice, this country is going down."


Fleming was merely pointing out a consequence of tax increases--that business owners will have less money to re-invest and hire new workers if they decline to take a pay cut. But his message likely won't resonate, as Jansing said, with "average Americans."
===============================================
No, what's taking this country down is people like this scumbag.

People in Louisiana should boycott his Subway shops and UPS store locations.

This guy and his family should leave the country with his $600,000 that he claims he can not feed his family with.

 

[mizzou]

I'm sick of the middle class getting no love

#1 regulate the crap out of social care/benefits (medicaid/food stamps/TANF)
All you have to do is have employees who are worth a damn and not disgustingly overworked, audit the stupid system and we could save $$$$$$$$$$$$$$$

#2 stop corporate loopholes sending jobs overseas. If the incentive isn't enough to bring work here, punish them for sending it elsewhere. Since America is king consumer, I don't see any business up and turning away from the cash crop when you compare the risks of leaving cold turkey

 

[Fern]

Dave, after taxes and personal expenses he may have $400k left over. Sounds like he wants to use the $400K to reinvest in his business(s). If he pays more in taxes, he has less to invest in his business.

It's that simple.

More glaring in the dumbazz reporter confusing 'gross income' with 'net income'. She has no business reporting/commenting on this subject.

Fern

 

[mizzou]

Dave, after taxes and personal expenses he may have $400k left over. Sounds like he wants to use the $400K to reinvest in his business(s). If he pays more in taxes, he has less to invest in his business.

It's that simple.

More glaring in the dumbazz reporter confusing 'gross income' with 'net income'. She has business reporting/commenting on this subject.

Fern

I think business owners will only reinvest the capital they feel is worthwhile, or worth taking risk.

Someone who is up for taking risk may put ALL of their capitol into the investment, leaving just enough behind for themselves, while others who are NO risk, will simply put up enough $ to keep the business status quo, and keep everything else.

Taxes I don't think will effect a business/capitalist minded decision at all, other then it's just another added expense on your spreadsheet

 

[dmcowen674]

Dave, after taxes and personal expenses he may have $400k left over. Sounds like he wants to use the $400K to reinvest in his business(s). If he pays more in taxes, he has less to invest in his business.

It's that simple.

More glaring in the dumbazz reporter confusing 'gross income' with 'net income'. She has business reporting/commenting on this subject.

Fern

There is no way to spin this or sugar coat it.

The guy can take that $400,000 and get out of here with his family he said he can not feed on that.

He said, period.

The lower class is slowly rising up and the war is on against people that hate this country like him.

The lower class will prevail.

 

[xBiffx]

Not really. On average, employees return more than $1 per $1 spent (or else businesses wouldn't have them).

So cutting $500,000 in salaries could be expected to cut more than $500,000 in income, which doesn't 'make up for that $500,000'.

But you missed the point, a higher tax rate INCENTS employment.

In no way is labor $1 for $1 equal to profit or even income. Quite the contrary. If an employee costs more or equal what they produce they aren't going to stay employed.

Also, higher rates do not "INCENTS" employment. The exact opposite is true. You think that a company is going to hire more just because they, as you said either, don't pay taxes on that labor. Hell no. Just because they don't pay taxes on the labor costs doesn't mean that it doesn't effect their profitability. They still have to pay to manage those costs.

 

[Fern]

There is no way to spin this or sugar coat it.

The guy can take that $400,000 and get out of here with his family he said he can not feed on that.
-snip-

Part of my point is that I didn't see where he said that in the article you quoted.

If he can't feed his family on $400K he has a problem and shouldn't be making spending decisions in Washington DC.

But I read it as him saying $200K for taxes and personal expenses. The rest ($400K) was for business investment.

I would think liberals would be applauding him. Unlike many businesses who are sitting on their cash, this one wants to invest it, spend it all.

Fern

 

[Fern]

-snip-
a higher tax rate INCENTS employment.

Bwuhahahaha!

WTH?

Fern

 

[Jhhnn]

Somewhat true, however you are operating under the erroneous belief all business investment is an immediate write-off, thus reducing taxes.

Examples:

If a business expanded, or simply thought it better to own their own location instead of renting, and bought land and constructed a building last year. The business bought land for $500K, and constructed a building/plant for $500k.

Now how much is deductible?

Of the $500K for land - zero. None.

Of the $500K for the building - about $13K.

So, they invested $1M and get to write off $13K. That's $987,000 they still pay tax on but after investing have zero left over to pay tax with.

While you may have a fairly simple business, in most cases the net income reported has little relationship to cash flow.

Fern

I believe that's dead wrong. The land and the building are expenses, and therefore entirely deductible. Business taxes aren't levied on cashflow, but after expense earnings. The money you take in minus expenses equals the taxable amount.

Edit- Fern's right. My mistake.

 

[dmcowen674]

Originally Posted by dmcowen674
There is no way to spin this or sugar coat it.

The guy can take that $400,000 and get out of here with his family he said he can not feed on that.
-snip-

Part of my point is that I didn't see where he said that in the article you quoted.

If he can't feed his family on $400K he has a problem and shouldn't be making spending decisions in Washington DC.

But I read it as him saying $200K for taxes and personal expenses. The rest ($400K) was for business investment.

I would think liberals would be applauding him. Unlike many businesses who are sitting on their cash, this one wants to invest it, spend it all.

Fern

You are splitting hairs trying to defend this ilk and his kind.

There is also nothing in there stating he wanted to "invest and spend it all".

Here is what he said again by itself:

"The amount that I have to reinvest in my business and feed my family is more like $600,000 of that $6.3 million," Fleming explained. "So by the time I feed my family I have, maybe, $400,000 left over to invest in new locations, upgrade my locations, buy more equipment."
============================================
So after all is said and done because of continued bullshit accounting by the rich he will not be subject to the proposal by Obama and he won't pay a penny in additional taxes anyway.

 

[Spikesoldier]

higher taxes = corporation packs up and leaves the US and opens <Company Name> China Corp.

we are already starting to see this domestically when states jack up the tax rate and the corps suddenly move that huge factory to <neighboring state>

 

[soccerballtux]

I think business owners will only reinvest the capital they feel is worthwhile, or worth taking risk.

Someone who is up for taking risk may put ALL of their capitol into the investment, leaving just enough behind for themselves, while others who are NO risk, will simply put up enough $ to keep the business status quo, and keep everything else.

Taxes I don't think will effect a business/capitalist minded decision at all, other then it's just another added expense on your spreadsheet

why do people play the lottery? because they have a 1 in 35million chance of winning? No, because they have a chance at winning 35 million dollars.
If they had a chance at winning $100,000 and the odds were the same, nobody would play.
You have to offset the risk with the reward.
Taxes reduce the reward and increase the risk of failing (higher cost of doing business).

 

[soccerballtux]

higher taxes = corporation packs up and leaves the US and opens <Company Name> China Corp.

we are already starting to see this domestically when states jack up the tax rate and the corps suddenly move that huge factory to <neighboring state>

GM is a prime example of this.
Trick is they get to still say "100% made in America".
Because "America" means the continent of America AKA Mexico counts.

 

[soccerballtux]

Bwuhahahaha!

WTH?

Fern

everyone draws a line in the sand SOMEWHERE where they are willing to listen to reason and where they embrace falsehood because they prefer it to truth. He's not going to shift his line. Why do you bother?