- Jul 10, 2006
You don't understand small businesses. Say I own a business and I'm working eighty hours a week. I'd like to work maybe fifty, so I'd like to hire someone. That employee comes off my profit, but her generated profit will be the profit I'm already generating with my additional hours. If my gross profit is $200,000 and I'm taxed at 35% of that (which as a professional services company I am, from dollar one) then I have a net profit of $130,000. Part of that I can take out (with the understanding that I'll be taxed again on it) and some or all I can keep in the business. If I have $1,000,000 invested in the business, then I have a return on investment of 13%. If I add that $50,000 employee, she'll cost me $72,000 in salary, matching taxes and bennies. I will also need to provide her with the tools she needs to do her job - let's say $7,500 initially plus $5,500 annually. (My wife won't let her set in my lap, so I'll need office space, and that space will probably need electricity for lights, heat, air conditioning, and office equipment.) Assuming I pay off the initial investment in three years and my depreciation covers financing and maintenance, my $50,000 employee is costing me roughly $80,000 per year. My gross profit is now $120,000, my net profit $78,000, my ROI $7.8%. At this point, I may be better off investing that million in the stock market or better yet, in China. My tax rate thus controls whether or not my business returns an ROI that makes the business feasible. A business venture must not only make money, it must make enough money to make the tied up capital worth keeping in the business.So far nothing I have read in response to my original post substantiates any argument that higher taxes have a meaningful impact on employment growth. A worker is either needed, or not. If needed, they should pay for themselves.
The numbers are different for other types of businesses, but the principle is the same. And all employees are not profit centers; some must be overhead by design, and many never generate enough profit to offset their expense. As far as profit-generating, production employees, even the best are seldom profitable immediately. In the long run, most employees should generate profit, but it's fractional; there are virtually no businesses where one can spend $50,000 and generate $100,000. Spending $80,000 on a "$50,000" employees in the hopes of eventually generating $90,000 is more typical of small businesses.