Tax Increases Will Create American Jobs - DailyKos

[WillyT]

Tax increases will create American jobs
bynaedre - DailyKos
SAT JUN 18, 2011 AT 06:52 PM PDT

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Lower tax rates Increase labor costs. Wait, what? That can't be right, can it? Low taxes for corporations increase labor costs? But what about all the conservatives saying business need tax cuts so they can hire more workers?

Yes, lower corporate income tax rates increase labor costs. You see, business get tax deductions for all their expenses, including worker salaries. (Internal Revenue Code Section 162.) So, the cost of a worker to a corporation is their salary times 100% minus the corporate tax rate (plus payroll taxes, which is a whole different diary, but I would not be opposed to a temporary payroll tax holiday.) If the cost of a worker abroad is lower than the cost of a worker in the US, then the corporation will hire people in other countries rather than here.

Let me illustrate this with a very simplified example. This example is not intended to reflect real American wages or the way corporations use subsidiaries to hide profits, it is just to demonstrate the principle of effective cost of labor in regards to tax rates.

A corporation, let's call them Paliburton, sells shoddy electrical equipment in the US. The cost of a worker in the United States is $10 per hour. The cost of a worker in Thailand is $5 per hour. The corporate tax rate in the United states is 35%, the corporate tax rate in Thailand is 0%, and there are no payroll taxes. Paliburton has shipping expenses approximately equal to $1.00 per worker hour if their products are made in Thailand and shipped to where they are sold in the US.

The cost of hiring a US worker is $6.50 per hour, because Paliburton pays $10 per hour, and then receives a tax deduction for their expenses, which at a 35% rate, gives them a $3.50 per hour benefit for hiring a US. worker. The cost of hiring a worker in Thailand is $6.00 per hour, because of the $5.00 per hour salary and $1.00 per worker-hour shipping expense. Since Thailand has 0% tax rate, they get no tax benefit for workers there.

Now lets pretend the House Republicans plan for taxes pass, and the corporate tax rate is lowered to 25%. The cost of labor in Thailand is unchanged at $6.00 per hour. The cost of labor in the United states rises from $6.50 per hour to 7.50 per hour, because deductions for business expenses are worth less with a lower tax rate.

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Much more: http://www.dailykos.com/story/2011/06/18/986600/-Tax-increases-will-create-American-jobs?via=spotlight

:kick:

[FreakinDJ]

1. + 1000

[WillyT]

2. Thanks !!!

:hi:

:kick:

[dkf]

3. Hey maybe Thailand will raise their tax rates to make their labor cheaper.

Wow why isnt there a race to raise taxes to attract businesses? It just doesnt make sense!

[Unvanguard]

4. This article is fundamentally confused, because it totally leaves out productivity.

Corporations do not get income from nowhere. If they did, they wouldn't hire anyone.

Assuming equal skill level for the American and the Thai worker (highly unlikely, but if we want oversimplification...), let's say hiring either one generates $12 of revenue for the company. Hiring the American worker costs $10, so the corporation gets $2 in profit, on which it pays 35%, or 70 cents, to the government in taxes. Hiring the Thai worker costs $6 (including shipping costs), so the corporation gets $6 in profit, of which it pays nothing to the government. Obviously, hiring the Thai worker is the better deal: $6 > $1.30.

Let's say we reduce the corporate tax rate to 25%. Now the company makes $1.50 by hiring the American rather than $1.30. That's still less than the Thai worker in the example, but it's more than the corporation would make under a higher tax rate.

Taxes are important. They fund vital programs. But they have real costs. Let's not forget that. (It is unlikely, however, that they have much to do with unemployment: the labor market adjusts to them.)

[FreakinDJ]

5. Its all moot - Most folks don't understand the Bush Tax Cuts for Corps

they don't get taxed at all on foreign income until they bring it back into the United States. Which forces them to NEVER bring it back into the USA even if the profits are earned here in the United States.

And this applies to a Corp's subsidiaries.

So parent Corp A buys $100 dollars worth of product from foreign subsidiary Corp B. Sells the $100 worth of product for $125.

Parent Corp A must pay taxes on the $25 dollars profit

Subsidiary Corp B (Parent Corp A's China facilities) pays Foreign taxes (China Value Added Tax 25%) which is passed onto the American consumer as part of the $100 product cost, but still makes $35 profit.

Under those guide lines the incentive is clear to invest overseas. Even when the R&D is performed here in the United States to maximize the write offs for Parent Corp A. Not only does the American consumer pay a disproportionate amount of China's Tax revenue, they are further penalized with subsidizing Oil cost in India and China that further drives up the cost of fuel here in America and slows our economy.

[xchrom]

7. +1

[xchrom]

6. recommend

[Motown_Johnny]

8. Don't corporations get taxed on profits, not income?

If so then all of the labor cost has already been deducted as an expense before we get anywhere near profit before taxes.

Not that corporations pay taxes on profits either.


An Alternative Minimum Tax for corporations based on income is something I keep posting here but never gets any traction, feel free to ignore it.