A story about jobs and taxes...

If you read the news or listen to the pundits on TV you are going to encounter a lot being said about jobs and how job growth would be effected by changes in tax policy. Recently a millionaire surtax was proposed but congressional members of the GOP and a few democrats started screaming that this tax would negatively effect job growth. They claimed that many small business owners would be effected by this tax and the 5.6% would cause these small business owners to curtail hiring. Of course at other times republicans have suggested that tax cuts to the wealthy would help to spur job creation. Is any of this true? Let's take a look at a short story about a small business and see how these ideas hold up.

John and Judy are a married couple in their 50's. John has managed retail operations for a computer manufacturer for the past 18 years and Judy is an accountant. They live a comfortable life but about a year ago they realized that they were tired of working for someone else and wanted to find a way to spend more time together. John loves to cook and Judy is quite a people person and so the idea came to them to open a small restaurant in the town where they live. Judy developed a plan to increase their savings so they could amass the capital they needed to open their restaurant and not have to touch the savings they had set aside for their retirement. After a couple of years of saving and studying they both quit their jobs and opened up their restaurant.

John worked in the kitchen cooking all of the food and Judy waited tables and took care of the books. From the very beginning things went well. After a couple of weeks news of their restaurant had spread and they were serving an average of 20 tables of customers every night. For just two people 20 tables is quite a bit to handle, but they both worked hard and their happy customers kept coming back. After being open for 5 months though things were about to change.

One morning Judy and John left home to go to work at the restaurant. On the way they stopped to put gas in their car and on a lark Judy bought a scratch off lottery ticket. When they arrived at the restaurant Judy scratched off the numbers and let out a yell that could be heard blocks away when she saw that they had just won $10,000.00! This was obviously their lucky day but little did they know that their good luck wasn't over. It was a good night at the restaurant and all of their customers left happy and full, it all seemed quite average until the next morning when John was reading the local newspaper. As it turns out one of their customers the night before was the food writer for the local paper and she had given their restaurant a glowing review! They excitedly left for work wondering what kind of effect the review would have on their business.

As it turns out the effect was astounding. Instead of having 20 tables of customers show up throughout the night 80 tables of customers showed up. There was no way that they could keep up with the demand and still provide the quality of food and level of service they had been praised for in the review and so they, sadly, had to turn many, many people away. John and Judy left the restaurant that night knowing that they had to make some big decisions.

They sat down the next morning to talk about how to handle the sudden influx of business they had experienced. Being good business people they knew that they couldn't count on 80 tables of customers showing up every night but knowing their competition and the area they are in they decided that 60 tables wouldn't be an unreasonable average to expect. The space that they were renting could easily handle the extra tables they would need but without adding a few employees the additional tables wouldn't help. They didn't have the man power needed to serve the additional tables. They started working up numbers and found that the additional employees they would need to deal with 60 tables worth of customers would run them around $1,200.00 a night. Their average check per table was $50.00 meaning that they were taking in about $1,000.00 a night by serving 20 tables, at 60 tables they would be bringing in around $3,000.00 a night in revenue. After subtracting the $1,200.00 per night for the total cost of the employees they would still be bringing in around $800.00 more per night in revenue, almost doubling their current revenue. Of course if they only served 40 tables a night they would be reducing their total revenue by $200.00 a night so there was risk involved in hiring any employees but they felt confident that the demand for their food would make it worth hiring a few employees.

While planning to open their business they made sure that they had enough money set aside for surprises just like this and so they ordered additional tables and plates and took out help wanted ads. Within a few weeks they were averaging around 70 tables a night as more people eating at their restaurant meant the positive word of mouth advertising about their business spread faster and created more demand. John and Judy knew that they had made a good decision and were thrilled to know that they might even be able to take some time off from the restaurant now that they had someone else to help them out with it.

So how does this relate to taxes? Did you notice how much impact wining $10,000.00 had on John and Judy's decisions to hire new employees? None. You see being good business people they had the monetary resources to handle the growth of their business. Even if they didn't have the cash on hand it would have made more sense to take out a loan for their expenses instead of spending their recent windfall. Why? Spending this money involved risk, as noted in the story when they discussed what would happen if they only served 40 tables a night. By obtaining a loan that they could pay off over time they would spread out the risk, if they had spent the $10,000.00 they won it could have been gone all at once. So just like the money they won a reduction in their tax rate would be seen as something separate from their need to hire. Hiring is based on demand, if John and Judy had won a million dollars but seen no increase in demand for their food they wouldn't have hired anyone as they would have simply been throwing their money away.

But what about a tax increase? We have been told over and over again that increasing taxes will cause businesses to stop or slow down their hiring. Again not true. The millionaire surtax that was proposed would have raised the taxes of those that it effected by 5.6%. Let's imagine that John and Judy's rent and food cost had suddenly went up by 5.6%, would they have still hired the new employees? Yes they would have. They hired because not hiring would have cost them money potentially. Hiring would allow them to make an additional $800.00 per night, not hiring would have cost them that $800.00 per night. A rise in the cost of their rent or in their food costs are unrelated to the extra demand they were experiencing just as a tax increase would be unrelated. If your weekly grocery bill goes up you don't turn your car into the finance company so you can stop making car payments. If you got rid of your car you wouldn't be able to go to work and buy any groceries in the first place. The same idea applies to a business, expenses are listed separately in their ledgers because they are individual expenses and have to be considered on an individual basis.

Taxes, and regulations, don't cause a company to hire or not hire, demand, or a lack there of, are what drives hiring. If the GOP are so pro-business why do our republican representatives seem to know so little about how businesses actually operate? Furthermore why do so many democrats sem willing to go along with their lies? The tax policies they are supporting won't create jobs, but they will allow the wealthy among us to keep more money in their pockets, and some of that money winds up being used as campaign contributions. That's what the arguments about tax policy actually come down to.