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Bad Econ 12 July 2010

Posted by magicdufflepud in Uncategorized.
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Traipsing around the internet, I often come across arguments that fail to account for basic economic fact–sentiments like “taxes are intrinsically bad” and the like. But while the sin of omission leaves readers with an incomplete understanding,  rarely does a commentator take an interest in the economics of a situation only to bungle the principles so badly as to actively harm comprehension.  Ed Quillen, published in Sunday’s Denver Post no less, does that. Consider the following thoughts from an op-ed with the thesis “taxes create jobs”

When I posed the question about federal taxes and jobs,[my accountant] pointed out that our arcane income-tax system actually creates plenty of jobs for people like him and his staff. “Why would you pay us to do the reckoning and fill out the forms if you could understand the tax code yourself?” he asked.

At least my annual tribute to him is tax-deductible, I mused, and pursued the question. For some enterprises, higher income-tax rates might encourage more employment, he said, citing his own office as an example. “Suppose my income-tax rate went up to 80 percent,” he said. “If I hired a manager to do what I’m doing, the employment expense would all be tax-deductible. So the choice would be between hiring somebody, or paying more money to the government. I’d be better off hiring somebody. Then I could take it easy, wouldn’t have to work so much, and employment would go up, thanks to higher taxes.”

No. A thousand times no. How could the paper of record for the entire mountain time zone allow this into print?

Let’s explore the critical failure here.

To be sure, Ed cites a few statistics indicating that unemployment fell during years with higher taxes rates, but we can safely ignore those in favor of examining the factors that precipitated them. Typically, higher tax rates can result in jobs because of targeted government spending flowing from the new cash.That is, a bit of government capital makes a budding market bloom, and new jobs appear without the need for more federal (or state) dollars.

The type of job creation he describes, however, is simply “friction” in the tax system. If the new employees exist simply to service a more burdensome tax regime, what value are they adding? None. And that’s the point. Money that may have gone to employ folks in value-building professions now wastes away as a response to government imposition. The only reason the employer hires someone in the accountant’s example is because he’s been forced to choose between two higher-cost scenarios. In one of them he pays more to the government and gets nothing. In the other, he hires someone and gets… something. Either way, he sends more cash out the door.

Imagine that Ed, as a creative writer, faced same situation, and I as a government representative came to his door to discuss his options.

“Well, you can pay an additional $40,000 a year in taxes, or you can hire an assistant with a net cost of $35,000/year,” I might tell him.

“But I don’t have any need of an assistant,” he’d say. “I do all my own writing. I take care of things around the house. It’s been this way for as long as I can remember.”

“Ed, Ed… These are your options. You don’t have another choice. It’s higher taxes or the assistant,” I’d tell him.

He might sigh with resignation, “If it’s one or the another, then I suppose I ought to go with the assistant. Maybe he can make coffee.”

“A wise choice, Ed. You’re creating a job. America thanks you.”

The point is this: if the additional cost of hiring an assistant had made sense in a low tax world, someone would already be bringing Ed his slippers and a latte every morning. But he didn’t need that. Hiring someone simply because it’s the lesser of two evils will not build an economy.  Jobs created through coercion will add little to no value. If, however, Ed spent the$40,000 that would have gone to taxes on boats and trinkets and oriental rugs, he’d have been supporting workers in a range of professions. And the aggregation of money in any business allows its owners to make the choice to hire new employees–employees who will put out useful work.

The economic issue here is deadweight loss. No tax is perfectly efficient, and the employment Ed champions is representative of that inefficiency. Only so much money exists to pass around, and wasting it on tax administrators does not expand the economy. I don’t believe out of hand that taxes kill jobs–they can indeed create them–but the money they generate must go where it will spur job creation after government cash dries up.

You’d do well to check this out: http://en.wikipedia.org/wiki/Deadweight_loss

[An afterthought: That some folks out there (the bad CEO, the TV DWI attorney) don’t build any meaningful economic value isn’t an indictment of my line of thinking. Generally, employers spend the money on new hires because it is in the best interest of the business to take on another employee. Sometimes they fail, and layoffs follow. Or, if you’re in France, you’re just stuck. In any event, anecdotal bad apples don’t provide a reason to cut down a statistically productive tree. ]

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