Want to create more jobs? No new taxes!
Author: - January 16, 2010 - Updated: January 16, 2010
These days, it seems that every elected official, regardless of party affiliation, talks about the need for jobs. Some in passing and some at length, but, either way, it’s jobs, jobs, jobs. And, after all, who could argue with that? Unfortunately, not everyone fully understands what it takes to create jobs. Or for that matter, what inhibits job creation. Certainly people who actually have run a business have a leg up, but I know firsthand of some who have, and who still don’t always get it.
I happened to be watching one of those call-in interview shows on CSPAN the other night. There was one caller who was addressing the economy. (As per usual on these shows, he was thinly trying to shape his opinions into a question.) He didn’t seem all that sophisticated, but then he said something that fell under the heading of a Blinding Flash of the Obvious. He said, “You know, business people aren’t out to create jobs. They’re out to make money.”
We’ve all probably heard small business owners bemoan the size of their staff. I’ve even been known to answer the question, “Do you have any kids?” with, “No, but I have 40 employees, and that’s kind of the same thing.” Tongue in cheek? Sure, but an element of truth? You betcha. And, really now, who wants 40 kids?
Most business people I know (and I include myself) certainly want to help others and to do what’s best for everyone. But let’s not fool ourselves. Our real primary motivation is to make money. I hate to say it, but if I can make the same profit with fewer employees (and thus fewer headaches) I’m going to do it. I’m sorry.
The moral to the story? Businesses will hire more people when they have to and when it’s worth it. Basically, that’s when they need to hire in order to make more money than they would without more personnel, not because somebody (the government or anyone else) urges them to. That sounds a little harsh, but it’s capitalism, and nobody should have to apologize for it.
So what’s the thought process? Simple. If I hire new employees, my cost is X. Whatever my product is, tangible or intangible, I better have enough incremental sales to more than cover X. Keep in mind that X is probably 35 percent to 40 percent more than those new people are actually getting paid, thanks to tax burden and overhead.
Which brings us to the correct strategy for any legislators who truly want to encourage job growth: Reduce that burden. In the 2009 legislative session, House Bill 1001 gave a tax credit for new job creation of up to half of the employer’s portion of FICA. That was great, absolutely fantastic. But let’s not forget that it amounts to about 3 percent of the employee’s pay. Let’s say that the new worker makes $40,000 a year. With unemployment taxes, Social Security, Medicaid, health insurance and other incremental costs, the employer’s cost is probably about $54,000 a year. Thanks to HB 1001 that cost is “only” $52,800.
Don’t get me wrong. That helps. But I’m trying to project whether I can sell enough additional product to more than cover that added labor cost (and of course that’s AFTER my margin). I must have an incredibly tight sales projection (and do we ever?) to know that I’m okay at $52,800, but not at $54,000. Is it a step in the right direction? Absolutely. Is that difference enough to significantly impact hiring decisions? Hmm …
Conversely, though, every single mandate on employers, no matter how small or seemingly insignificant, is a step in the wrong direction. It’s guaranteed to restrict job growth. It could be a lot or maybe just a little, but it will. Just as we hope that a modest $1,200 credit will help encourage me to hire a new employee, any legislation that adds even a little bit of cost, no matter how worthwhile its purpose may be, is going to reduce the likelihood of me hiring someone. Period.
Lastly, in these uncertain times, most businesses are even less eager than usual to add jobs. We certainly don’t want to hire people only to find out that we have to lay them off later. Given that reluctance, any sort of increased costs, even those not directly associated with the jobs themselves, is going to further dissuade hiring. The currently proposed tax increases (call them elimination of tax exemptions if you want … it’s a matter of semantics and spells more cost to business either way) will absolutely reduce job creation. Anybody who doesn’t think so has never run a business. But that’s a topic for another day.
Rob LeVine is general manager of the Antlers at Vail Condominiums. He has served on the Vail Town Council and many other boards. He is currently on the board of the Colorado Association of Commerce and Industry.