Friday, November 09, 2012

The Mathematics of Tax Increases and Job Creation Supports Democratic Argument

IN the recent election, polls showed that more than 60% of voters believe that the Bush era tax cuts on upper income earners should be allowed to expire. The argument put forward against this by the Republicans has always been that increasing the taxes on the upper bracket, would discourage job creation and ultimately hurt the economy. This was the back and forth I saw on the news most of the day Wednesday and Thursday, so I decided to do some number crunching. It turns out even if you don’t care one bit for the Democrats or the President, the math holds water with the Democrats argument. Let me illustrate with some very basic examples. Let’s start with a person who earned 500,000 in yearly income. Under the Democratic proposal pushed by the President, the rate on the lower 250 grand would remain 36% and the rate on the income above that would be 39%. So here is the very basic tax bill before any deductions are added in, which we all know are more plentiful for higher income earners to begin with. Prior to the Bush cuts, the tax bill prededuction on 500,000 would have been 195,000. With the Bush cuts in effect, the bill again before any deductions is now 180,000, a reduction before deductions kick in of 15,000. Using the proposal put forward by President Obama and the Democrats, that tax bill before deductions is now 187,500, or an increase prior to deductions of just 7,500. How much would it cost to hire just 1 worker if they were paid minimum wage, 15,080. IN other words, the cost of hiring just one worker at the absolute cheapest salary that could be paid, with 0 benefits to speak of, would be twice the amount of the proposed tax increase. We all know that most skilled workers are going to earn significantly more than that in a calendar year, assuming we are talking about a full-time 40 hour per week salary. How about the numbers for someone who earned a million dollars in yearly income, again the numbers show that job creation is not impacted one bit. Keep that $15,080 minimum salary in mind for a full-time worker, we all know that in most cases that number is significantly higher. The tax bill prior to deductions on 1,000,000 of income was 395,000 prior to Bush cuts, 360,000 after Bush cuts, and would now become 382,500 with the new proposal, an increase before deductions of 22,500 which would be equal to paying one full-time worker a salary of $1,875 per month with no benefits of any sort in income before their deductions kicked in for typical tax purposes that are on the shoulders of the worker, not the employer. This amount as an hourly wage would come to a fraction below $10.82 per hour. If a person was looking for jobs and what they were finding paid them this salary, they would want to try to get a job with additional benefits, so if the person earning the 1,000,000 income offered those benefits, then their out of pocket costs as the employer would be even higher, again showing that the cost of just this single worker exceeds the tax increase, even more so after they get their tax deductions. How about someone who earned 2,000,000 a year. Prior to Bush, their tax bill before deduction, 780,000, after the bush cuts the figure was 720,000, under the new proposal that figure again before deductions, 772,500, or an increase of 52,500. This increase would be equal to what it would cost to hire only two workers while paying them an annual salary of $26,250 each, which comes to $2,187.50 per month prior to taxes that are put on the shoulder of the worker, this amount full-time hourly would come to a fraction above $12.62. Again, the person seeking work is going to want to try and find a job with extra benefits, so once again this would be a greater cost to the employer and so again, time you add these additional costs per worker and add the tax deductions the employer would get, we are still looking at a tax increase that is equal to the creation of just 1, at most 2 jobs. When you look at those figures and see that the cost of workers is going to be greater than the extra tax increase, especially when you consider that these calculations are done before the deductions that are always taken kick in, and the impact on job creation claim is debunked. Just for grins, , let’s look at 5,000,000 in income, again keeping in mind that these calculations don’t include the many deductions that are taken which would reduce the impact of this increased tax rate for the person considered the employer. Before the Bush cuts, the prededuction tax bill would have been 1,950,000, after the Bush cuts that figure dips to 1,800,000 and under the new proposal they will return to near the Clinton era figure, 1,942,500 to be exact, or an increase of 142,500. How many jobs would 142,500 create, only 5 at an average pay of $28,500 per year, which comes to $2375 per month prior to deductions that are on the workers shoulder, or an hourly wage of a fraction over $13.70 before those same deductions are placed on the worker. Keep in mind too that if you tack on additional benefits that do not come with the salary of the worker, then this means the employer has an even higher cost per worker. So that 5 workers that a 5,000,000 income level employer had becomes more like 2 or 3 if the employer was more generous with benefits and such. So now we are talking a tax increase before deductions on 5,000,000 that would only equal a couple workers with benefits and when you then kick in the deductions the employer takes on that 5,000,000, then the argument can easily be made that the extra taxes paid by someone even at this high income level, would at most equal the creation of 1 or 2 jobs. Put this another way, that for the very basic tax increase to even equal the pay from the employer to equal one low paying job, we would be talking about those individuals who earn at minimum 1,000,000 in yearly income, job creation is a greater cost than the tax increase on any income under this amount, the math tells that story. So when you see these figures, remember these basic truths. That the workers are paid less than the actual figures once government taxes are included that come out of their pocket as the employee. Meanwhile for the employer/job creator, the actual tax increase on the high income will be less than the figures shown because of additional deductions that the person who would be considered the employer gets to take from having such high income and access to deductions that Joe Smith and Jane jones can’t take. This leaves only one very basic conclusion backed up by truth, by hard mathematics, the GOP argument that increasing the taxes on the upper income bracket kills jobs argument does not hold water. In fact, it is a leaking civ. Most small business owners who bring in 300, 500, 700K a year pay more to hire a single worker, than they would in extra taxes under the proposal that has been pushed by the Democrats. We need to make sure that all of our Congressional representatives and Senators see these hard figures. They need to make the correct choice which means ending the Bush era taxes on income over 250K and cutting spending along with it.

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