Thursday, December 2, 2010

Personal income taxes and job creation

With elections over, the issue of whether to extend the Bush-era personal income tax cuts to families earning over $250,000 a year is back in the news. Currently, there is a 33% tax bracket that affects income in excess of $209,250 and a 35% tax bracket for income in excess of $372,950 (for joint filers). So, in effect, under the Democratic proposal, a new tax bracket will be created between the two existing brackets like so:


The exact numbers may still change as the details are worked out, but bear with me.

The Republicans are currently pushing to extend the Bush-era personal income tax cuts to families earning over $1,000,000 a year or extend them to everyone. If this were to come to pass, again an extra tax bracket would be created, but it would look something like:


Again, the exact numbers aren't all that important. For the sake of example, though, let's look at a scenario of a family making a cool half-a-million dollars a year in personal income. Currently, this family would be paying approximately $141,563 in federal income tax (assuming the standard deduction of $10,700 for 2010).

BracketRangeDollars Taxed
in this Bracket
Tax Amount
10%$0 – $16,750$16,750$1,675.00
15%$16,751 – $68,000$51,250$7,687.50
25%$68,001 – $137,300$69,300$17,325.00
28%$137,301 – $209,250$71,950$20,146.00
33%$209,251 – $373,650$164,400$54,252.00
35%$373,651 +$115,650$40,477.50

Wow, that's a big number. It is funny to think we're having all this argument over people earning so much money that their taxes are triple what the average American grosses in a year.

Anyway, our poor put-out example family is paying $141,563 out of their $500,000 annual income in federal income tax. That is an effective tax rate of 28.3%.

Under the Republicans' proposed plan, there would be no change in the amount of federal income tax paid by our hypothetical family since they earn less than 1 million dollars a year.

Under the Democrats' proposed plan, our hypothetical family would have to pay $150,592 in tax, which is 30.1% of their income.

BracketRangeDollars Taxed
in this Bracket
Tax Amount
10%$0 – $16,750$16,750$1,675.00
15%$16,751 – $68,000$51,250$7,687.50
25%$68,001 – $137,300$69,300$17,325.00
28%$137,301 – $209,250$71,950$20,146.00
33%$209,251 – $250,000$40,750$13,447.50
36%$250,001 – $373,650$123,650$44,514.00
39.6%$373,651 +$115,650$45,797.40

So the difference between the two proposals amounts to a 1.8% tax increase in this example. With a little hand-waving, let's just say the argument is over a 2% tax increase affecting families earning between $250,000 and $1,000,000 a year.

The Republicans claim that this tax will curb job creation. In response to the vote in the House of Representatives approving of the Democrat's proposal, Republican representative Gary Miller of California issued a statement saying
During these difficult economic times, raising taxes on any American family or small business will not help our economy recover nor foster the private-sector job growth needed to achieve economic recovery. The only thing that Democrats have accomplished by today's vote is yet more uncertainty for our nation's job creators.

Certainly, no one will argue that the U.S. could use more jobs. But is a 2% personal income tax increase going to materially affect job creation? Returning to the example above, a small business owner making $500,000 a year would see a difference of about $9000 in their take-home pay. That isn't enough to create even one job.

In any event, this ignores the elephant in the room: the issue being debated is a tax rate on personal income tax, not corporate tax. Why would a business owner pay out income from their business to themselves, incurring personal income tax, only to reinvest that money into their business? Wouldn't it make more sense to create those jobs using *before* tax dollars? And that is what any business owner can do -- and is doing -- right now, under the current tax law. And what they'll be able to continue doing no matter what happens with regards to personal income tax.

So it is patently silly to think that a decrease of any kind in the personal income tax is going to affect job creation. The money that creates jobs isn't taxed. You don't get lower than a zero percent tax rate. Businesses are not directly affected by the personal income tax rate.

No, the Republicans' cherished 2% tax cut on families making more than $250,000 a year only helps wealthy people put more money in their pockets. At best, businesses may benefit indirectly by virtue of the fact that wealthy people have more disposable income.


Tim M. said...

Many small businesses file income taxes on the owner's individual income tax forms, and any increase in taxation is an expense that has to be covered from the business somehow, typ. by not hiring more people or expanding/modernizing/advertising.

Any time you take more money away from people, they are going to have less to spend on the things *they* need or want. Even buying yachts gives the people who build the things a job.

Kelly Yancey said...

And poor people buy more stuff than rich people. So, if you want to boost spending by giving people a tax break on their *personal* tax return, it should be given to the poor.

If you want businesses to create jobs, you need to give them a corporate tax break, not a personal-income tax break.

Federal corporate tax rates are actually lower than personal income tax rates for the same gross income. So if small business owners were really concerned about putting those tax savings into creating jobs, they could do it now just by filing as a corporation.

And you can't claim they can't afford the corporation filing fees: we're talking about people making over 250 grand a year.