Paul Krugman has an excellent post regarding the incentives of marginal tax rates. He shows that marginal tax rates are highest on low income people trying to wean themselves off welfare programs. I wrote about this before: Catch-22 for Poor in America. Krugman also talks about how the rich don’t do anything special in the economy; they spend money and this (along with the spending of everyone else) is the engine of the economy, not all the people many of the rich employ.
I want to add something that I think is rarely stated—but is sometimes. I’ve had several of my own small businesses with some amount of success. I grew up in a household of small business people. And I’ve worked for a lot of small businesses. The one thing I can tell you is this:
Why is this? Because hiring an employee costs money. If you can make do with your existing resources, you will make more money. It is as simple as that.
I’ve never known a business owner who worried about what his tax rate was when making a business decision. And he would be mad to be worried about this. Here is the question: am I making money? He may not be happy that he will have to give the government a bunch of money at the end of the quarter, but that’s another question. And it is certainly not the case that an employer worries about the cost of an employee one or two or three years from now. If the employee is no longer a profitable investment, the employer will just lay him off.
At the heart of this is the fact that the employer will not hire anyone unless someone else is buying what he has to sell. That means when you buy can of soda or a screwdriver, you are a job creator—every bit as much as someone who explicitly employs people. Because here’s the thing: when you buy that Coca Cola, you are hiring the Coca Cola Bottling Company to provide it. Yes, there are a lot of middlemen between you and the employees who actually make and bottle the stuff, but that doesn’t matter.
I find this so aggravating! Every time I hear the clause “job creator” I have to stop myself from screaming. It’s true that the rich are job creators. The problem is that since the rich don’t spend all their money (Why else would they invest in bonds with negative real interest rates?) they are actually far less effective job creators than the poor.
Update (13 July 2012 8:30 am)
Paul Krugman backs up my basic argument in today’s column, although he doesn’t go as far:
Image reduced from a nice big one on Thurman’s Notebook.