Do Tax Cuts for the Wealthy Create Jobs?

Here is the nitty-gritty of the argument. How do individual tax rates on personal income affect the business cash flow of businesses? In other words, how do changes in the personal W-2 tax rates transfer over to the business general cash flow. Answer: They don't.

Leaving the health mandate aside for now, if a business owner got a 4% increase in their taxes on their personal W-2 wages that does not translate into lost operating capital for the business entity.

Reductions in personal tax rates affect the take home pay of the wealthy person. That is a separate pool of money from the business checking account.

It is true that owners of S-Corps and LLC's have pass-through income from their company to their personal tax returns but only about 5% of S-Corp and LLC owners show more than $250,000 in income and have employees.

Thus, this idea that tax cuts for the wealthy is a job creator is mostly false.

 

I am a small business owner.

No it doesn't. That's not how the tax brackets work.

How many sole proprietorships have employees? AND earn over $250,000? Answer: Not many, and if there are any they ought to reorganize as an S-Corp. In any event, sole proprietorships are not big hiring entities. Well, they don't hire outside of the family.

The fact is that for most small businesses that have employees personal and business funds are distinctly different.

 

According to a survey of 1,100 respondents the range of pay for a Sole Proprietorship is between $38,000 and $96,000.

http://www.payscale.com/research/US/Job=Small_Business_Owner_/_Operator/Salary

Another says that it ranges from $35,000 to $64,000 with an average of $44,576.

http://www.cbsalary.com/national-sa...Small+Business+Owner&jn=jn037&edu=&tid=105988


According to the U.S. Census the median income of Sole Proprietors is $31,246. (Self-employed non-farm workers)

http://pubdb3.census.gov/macro/032008/perinc/new09_001.htm

Also note at that U.S. Census site that the number of SP's is 12,499,000.

So it would appear the number of Sole Proprietorships making over $250,000 is practically non-existent.

Wrong.


Since the mid-1980s, the number of S corporations had risen rapidly, growing from 724,749 in 1985 to 3,154,377 in 2002. Among S corporations with more than $10 million in assets, the growth rate has been even faster. From 1985 to 2002, the number of these larger S corporations grew more than ten-fold, from 2,305 to 26,096.

“The use of S corporations has exploded,” observed IRS Commissioner at the time, Mark W. Everson. “The IRS needs a better understanding of what this means for tax compliance. This research is critical for achieving our strategic goal of ensuring that corporations and high-income individuals are paying their fair share," Everson added.

S corporations are now the most common corporate entity. In 2009, the IRS reported that the number of S corporations increased 5.1 percent to 3.9 million for tax year 2006, so that S corporations represent nearly two-thirds of all U.S. corporations.

http://www.usa-federal-state-company-tax.com/s_corporation.asp

Months ago at the Department of Labor web site I found that only 5% of S-Corp owners claimed taxable income of over $250,000 a year and the vast majority of them were doctors, dentists, attorneys, and accountants that did not have employees. I've tried to find that again but I couldn't.

It is very important. Family members make a difference. A Sole Proprietor may hire children under 18 and not have to pay FICA or Medicare taxes on their wages. Minor children may be paid up to the standard deduction for single people without incurring federal tax withholdings. In other words you can pay your child up to $5,700 without having to withhold federal taxes. Furthermore, any wages paid to these children is considered an expense against the business owner's income. Therefore the SP can pay his kids money tax free and that money reduces the SP's taxable income.

Also, it isn't prudent for SP's to hire non-family members because personal liability issues would fall on the SP, since the business is not incorporated.

(I could not find how many SP's hire non-family members. Can you?)

I think it is provable. The wealthy CEO of a C corporation has no connection between his personal wages and the company cash flow. Therefore reducing his/her taxes does not affect the business operating capital.

In S-Corps the company's earnings are a part of the owner's salary so there is a connection between the take home pay of the owner and the company cash flow. Cut an S-Corps owner's taxes and they will have more income to use in the business. But less than 5% of S-Corps have owners making over $250,000 and most of these people don't have employees to begin with.

Now take a hypothetical (and rare) S-Corp owner that makes $350,000 a year. When the Bush tax cuts kicked in his top rate went from 39.6% to 35%. So let's assume his taxes got cut by 4.6%, or $16,100. Is that owner going to hire someone with that money? Highly unlikely. Employers hire people because their business is expanding and they need workers. A tax cut does not directly create demand for a business's products or services.

So i think it's pretty easy to say that tax cuts for the wealthy don't create jobs.

I can agree with that!

 

Why not? The number of wealthy business owners that have pass through income from their businesses to their personal checkbook is negligible. These are the people that would have business operating capital available from a personal wage tax cut.

Furthermore, there is no reason to believe that these people receiving a tax cut would receive enough money to be able to hire someone, and even if they got enough money that they would actually hire someone.

Sorry, but I think I've made a compelling factual case. I favor tax cuts. I favor deep cuts in government spending. But I get rankled when the right trots out this unsupportable idea that rich people need tax cuts because they create jobs. It's just not so.

Yep.