Technogeek wrote:
Actually, I'm claiming tax rates have ******* to do with job creation. DEMAND has to do with job creation, dipsh*t.
Follow the logic though. How does demand increase job creation? Assuming you mean demand for products and services provided by working people, then that demand will only result in increased job creation if the resulting profits from the employer fulfilling that demand is greater if he hires more people than if he doesn't. It's an easy concept to test. If a million people demand $5 widgets, but the cost to build a widget (which includes labor cost) is $6, that demand will never be met. Demand only results in increased product creation (and the labor to do so) if meeting the demand results in more profit for the employer. If there's demand for 500,000 widgets at $10, then the employer will hire enough people to fill that demand, making a $4/widget profit. Since that will generate $2M in total profit, while meeting the 1 million unit demand would result in a loss of $1M, he's going to employ enough to build 500k instead of 1M. Simple economic theory at this point, right?
Now, while you can correctly argue that tax rate changes wont affect hiring decisions with regard to widget production, it *will* affect external choices like whether to invest in a widget factory or a business generating intellectual property, or in commodities, or bonds, or even foreign markets. Imagine you are the owner of that widget factory. Let's imagine that you're currently building 500k widgets a year, but think that the demand has increased for widgets and you could now sell 1M units at $8 per widget. That's not a good choice because your current costs are $6/widget, so you make the same profit of $2M whether you sell 500k at $10 ($4/widget profit) or 1M at $8 ($2/widget profit). But what if, as you suggest, demand just straight up increases? What if now there's demand for 700k widgets at $10/widget? Hmmmm... But you currently only employ enough to product 500k. You'd need to hire more workers. You'd also need to expand your factory to meet this new demand. Here's the problem. It'll cost you $4M dollars to build the new facilities. This means that the increased $400k per year in profit from the increased demand will pay you back in 10 years. After that, you're golden. So that's a possible choice. But what if you could just toss that $4M into some other investment that'll earn you some interest rate back each year. Let's also imagine that you're not sure how much labor costs may increase over the next 10 years. You might not want to commit to a venture that will require that long to get a return. It's not as simple as assuming that increased demand will always result in increased jobs. It only creates the potential for increased jobs. That potential has to be filled, and the choice to fill it is absolutely based on relative profits. And guess what? Tax rates absolutely can affect those choices.
There's also a more direct way it affects job creation. I've mentioned this in the past, but I'll repeat it here. There's also a matter of the rate at which a business can grow in the first place. Let's assume that in the last example, the factors are such that the widget factory owner does decide to spend $4M in profits to fill that increased demand (and hire more people). But he has to have $4M to spend. Assuming his $2M profit rate, it should take him 2 years to save up the money, right (24 months)? But if he's paying a 30% tax rate, then he only actually has $1.4M in profit each year. Thus, it'll take him 34 months to save up the money. Similarly, if we raise his taxes to $50, it'll take him 48 months to save up enough to expand his business and hire those employees.
Thus, assuming that employers don't normally have idle money sitting around doing nothing at all, the rate at which they can create new jobs to meet new demand for their products is directly affected by the tax rate on past and present profits. It's in direct relation. Tax half the profit, and it'll take twice as long to hire X number of workers as if you didn't tax at all. Tax rates directly affects the amount of profit retained, thus it directly affects the rate at which those profits can be spent expanding the business and hiring new workers. Obviously, this is a simplification of the process (cause we have things like loans), but future profits after tax affects the rate at which a business can pay back those loans. No matter how we manipulate the dollars, the tax rate on profits ends out directly affecting the rate at which anything can be done with those profits. Assuming some ratio of profits to job creation, it will therefore directly affect job creation.
Demand affects the potential for labor creation. But profits off past (and future) labor affects how quickly the economy actually reacts to that demand. That's particularly relevant right now where businesses aren't sure what their future profits will be from labor, thus are hesitant to invest in ventures which may require many years to earn a return off said labor. They're much more likely to put that money somewhere where they can earn some profit right now and is flexible enough that they can shift that money somewhere else later if they need to. Once you've spent the money on a new widget factory, you're kinda stuck with hiring enough people to make enough widgets to earn back the money you spent. And if something happens to upset your apple cart, you may go out of business as a result of that choice. You can't just move the money you spent somewhere else. You're stuck.