Saturday, August 13, 2011

Taxes and job creation

Raising taxes on wealthy Americans doesn't stifle job creation. In fact, it could even enhance it -- if wealthy Americans aren't greedy.

I agree that raising taxes on businesses would stifle job creation. But all the talk we hear lately is about raising taxes on personal income. If the taxes raised are those of a wealthy business owner, it is only the salary that the business pays the owner that is taxed, not the business's income. The business's net profit would be unchanged by the tax increase, so it should cause no change in the business's hiring practices.

But here's how it could actually enhance job creation. Let's say the wealthy business owner doesn't want his personal income taxed at a higher rate. All he has to do is lower the salary his business pays him to a tax bracket with a lower rate. On average, CEOs earn a hugely disproportionate income relative to the other employees in their business, so they should be able to afford a decrease in their salary -- particularly if it means growing their business so it can be more profitable in the long run.

All else unchanged, the decrease in salary would result in an increase in the retained earnings of the business. This increase in retained earnings thereby increases the wealth of the person who owns the business by the same amount but he doesn't get taxed on it because it's not regular income. However, by virtue of the business having greater retained earnings, the incremental capital assets is an incentive for the business to grow, which means increased job creation.