The Real Job Creators

August 16, 2011

The national budget and how to resolve our deficit and debt issues is certainly on the minds on many Americans especially after the debt ceiling debacle. We heard the merits of cuts versus revenue. One talking point that arose repeatedly was the need to avoid raising taxes on the wealthy to protect the “job creators”.

It is a powerful talking point. However, when you look beyond the surface it is easy to see that this premise is complete propaganda. Those using it want working and middle class Americans to be scared. The unspoken, underlying message is that we better keep our mouths shut about raising taxes on the wealthy or we might be out of a job.

Not all wealthy individuals create jobs

The first thing that is important to recognize in debunking this myth is that not everyone in the top income tax bracket can create jobs. There are individuals who simply earn extremely large salaries but do not own businesses. Some examples include high level university administrators at prominent institutions, athletic coaches for NCAA or professional teams, high level corporate executives (i.e., Vice Presidents), financial executives, and hedge fund managers just to name a few.

Typical small business owner salaries

The top income tax bracket begins with taxable individual income of $379,151 per year. However, the vast majority of small business owners do not make a salary that is even close to this amount. According to the Center on Budget and Policy Priorities, less than 2 percent of small business owners make over $250,000 per year. Many studies suggest that most small business owners make between $25,000 and $100,000 per year. Newer business tend to produce owner salaries levels in the lower portion of the range. Businesses that have been operating long-term (i.e., 10 years or more) may yield slightly greater owner salaries in the lower $100,000s. Given these facts, it is easy to see that a slight increase in the top tax rate is unlikely to affect many small business owners despite the fact that many politicians cite the impact on small business as the primary reason we can’t raise taxes on the wealthy.

Reality check: The actual impact on small business owners

For the sake of argument, let’s accept the premise that we are dealing with a small business owner making a salary that falls in the top tax bracket. In 2011, those with individual earned income above $379,151 have that portion of their income taxed at the highest 35% rate. If an unusually successful small business owner (who is married with two children) has a individual taxable income of $450,000 per year, that individual currently has a monthly take home pay of approximately $23,114.

If we were to raise the tax rate on this individual’s income over $379,151 to 39.6% (which was the top tax rate the last time we had a balanced budget during the Clinton administration), this business owner would have a monthly take home pay of roughly $22,842. This is a difference of only $272 per month.

These kinds of tax increases are often described by the opposition as “overwhelming” and the implication is that someone might lose their job if we raise the top rate slightly. But when you look at the actual numbers, the argument is completely ridiculous and without merit. It is almost unimaginable that this business owner could not make ends meet on $22,842 a month and would need to fire some poor soul to recover the extra $272. This amount of monthly income is almost exactly the same as the total yearly take home pay for a single person making $30,000. Frankly, if someone can’t make ends meet on $22,842 monthly, then THEY have a spending problem and not a revenue problem.

Tax cuts for the wealthy: All cost and no reward

The Bush tax cuts that decreased the top rate to 35% are responsible for an enormous portion of our current debt that has been accumulated since the early 2000’s. As if this weren’t bad enough, the recent Ryan budget plan proposed cutting this top rate even further to 25% while making cuts to programs and services that would very negatively affect working and middle class families, senior citizens and students.

By changing the top tax rate to 25%, our example business owner with $450,000 of taxable income would get an additional $7,085 per year (just over $590 per month). This is not even close to the amount needed to create one full-time minimum wage job. Given this fact, how can anyone argue that this tax cut will create jobs?

Jobs or campaign contributions?

You might be asking, if job creation is not the real outcome, what is the actual agenda? I frankly believe that many who promote these cuts want to establish an unspoken, unholy alliance with wealthy individuals to give them a bit more disposable income in exchange for robust campaign contributions. Over the course of two years, this business owner will have just over $14,000 in extra disposable income, enough to donate the maximum to two federal level campaigns (at $4800 each), a bit to a state race or two and still have extra left over for their own purposes. It is disturbing to think that much of this money may be flowing into campaign coffers instead of doing something to help our country.

Legal tax avoidance for the wealthy

If the alliance for campaign contributions isn’t a reprehensible enough idea, the IRS recently released a study that indicated just under 1,500 millionaires paid no tax in 2009. These folks obviously had tax attorneys and/or CPAs hard at work to find every possible deduction, exemption, and loophole. It is sickening to realize that most working Americans paid more in taxes than these millionaires who paid nothing. This is inexcusable and should not be allowed to happen.

We are the real job creators

There are real job creators in this country. But the true job creators are not who the politicians spouting talking points lead us to believe. The real job creators are the American people. Every time you purchase goods and services from a small business or corporation, you are part of what enables the businesses to keep employees and to grow. Business and corporations are not charitable institutions. They are not creating jobs out of the goodness of their hearts. They are creating jobs with our money.

We need new and better leadership especially in both houses of Congress. To move forward and save our country we need:

  1. Jobs
  2. Tax reform
  3. Bloated budget reductions (primarily in defense which has tripled in recent years)

In my upcoming articles and videos, I will talk in detail about each of these items that are so important for our future.

If you remember only one thing from this article, remember this: we are the real job creators. So the next time you hear a politician spouting talking points and trying to convince you that we can’t slightly increase taxes on the wealthy because they are the job creators – do not believe it!

  • Brad Miller

    Interesting comments – enjoyed the video

  • Loved it! Can you connect me to your links to the numbers you used? I don’t doubt you. I just need to be able to back up the facts for my very political, pro-democracy friends. Thank you!

  • Jack_gott

    profoundly ignorant….your inability to understand simple math is exceeded only by the absurdity of infantile vacuum of common sense.  

    • Math2

      Jack: You contribution to this discussion is explained in your comment. I think the article was excellent and mathematically factual

  • Well Jack – I invite you to look at my second post where I walk readers through the calculations and provide links to all sources. http://www.sapphirewire.com/2011/the-story-behind-the-story/

    I don’t find your comment very compelling as you don’t provide any evidence for why you feel I’m wrong. I assure you my calculations are correct. Many people have misconceptions about how taxes are calculated. Perhaps you are one of them.

  • Gabe Downey

    Lisa, kudos on a compelling, fact-driven argument, your analysis of tax rate impact on small business owners is particularly insightful; however, I would also point out that there is no inherent causation between a business owner having more capital and actually increasing employment.  Common sense says that I will only expand my business if I can reasonably expect that expansion to pay for itself.  Thus simply placing more capital in ownership’s hands (reducing taxes) has no necessary impact on employment.  Likewise, if I can expect to make a profit through expanded employment I will readily pay the price of credit so long as I can still expect profitability.  Clearly, the price of credit can matter but it can always be overcome if the expected profit is sufficient.  
    This is certainly not meant as a refutation of your work, just meant as an aside or addendum.

  • Gabe, I absolutely agree with your point. There is no guarantee that a business owner will use additional capital to create jobs. And tax cuts are not the only way for a business to get some working capital to create jobs as you note when you discuss credit.

    Unfortunately, along with the job creator myth, it is often implied that businesses will create jobs if they have additional capital. I wanted to demonstrate in the article that many small business owners would not be recovering enough working capital to create a job with the tax cut from 35% to 25% on income above $379,151.

    Once we begin talking about multi-millionaires, they would recover enough that they *could* create a job or two. But, as you note, we have no assurance that they will.

    Corporations are particularly guilty of this right now. Second quarter profits were excellent but job creation is still poor. I discuss this a bit midway through my article about economic recovery – http://www.sapphirewire.com/2011/the-path-to-economic-recovery/

  • The Randy Conyers of KS

    Let’s put tax increase/tax cuts out of our mind and focus on creating jobs.  The majority of companies in the US are small business owners,  the payers for “everything”.  Being able to borrow money at an extremely low interest rate is what keeps these small business alive.  Access to a constant flow of low interest credit is a must.  You can’t give tax credits to businesses that don’t make enough money in the first place. A steady cash flow is needed for existing small business and newly formed small business.  Creating jobs is the same as creating small companies.  When it is said “we are the job creators”, it could be re-stated as “we are the creators of small businesses.  Only a few existing companies add jobs. Once in a great while we’ll see 400+ jobs being recalled and we perceive this as new job, which they are not.  New companies are the ones who creates new jobs, new stores create new jobs, new casinos create new jobs.  We have to continue to create new companies until the ratio of 5,000 people applying for 400 jobs comes down to 800 people applying for the 400 jobs.