Friday, October 03, 2008

Just a note about economic theory

I'm watching the VP debate through now, and Governor Palin chirps that lowering taxes on small business will increase the number of jobs they create, you betcha.

The Republicans like to talk about how, if you lower taxes on small businesses, they'll create more jobs.

Is that an accurate assessment?

Well, here's a question. Looking at economics, if you increase the price of something, do you get more of it, or less of it?

Less.

Hey, don't blame me, I'm just the messenger.

If you decrease taxes on small businesses, you increase the cost of hiring a worker. Salaries are a deductible business expense. If the tax rate is 50%, a job that costs $40k a year only costs $20k; if the tax rate is lowered to 40%, it now costs $24k.

Now, I am not saying that higher taxes are better; make taxes too high, and no one feels like producing much past a certain point. If tax rates are 90% above a certain amount, no one is going to expend the effort to earn more than that amount... unless the effort is minimal[1].

But let's not pretend that lowering taxes means increasing jobs. Lower taxes means that every job an employer can eliminate means that much more money for the employer to take home.

Yes, it's true: if that employer takes home more money, s/he'll spend more money. But if it's taxed by the government, the government will spend more money, and also borrow less, leaving more money available for investment, which will also improve the economy.

Don't let anyone - not even a perky VP candidate - feed you a line that's so oversimplified it doesn't even make sense on its face.

[1] e.g. if the lower bracket rate is 30% and the higher is 90%, people will only expend one seventh the effort. In the 30% bracket, they take home 70 cents on each dollar earned; in the 90% bracket, they take home only 10 cents on each dollar. This, of course, assumes people follow economic principles, which they don't. But the principle holds.

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