Tax Cuts HURT Small And Medium Businesses

This post originally appeared at Campaign for America's Future (CAF). I am a Fellow with CAF.

Much of the public believes that tax cuts "create jobs." A recent Rasmussen poll found that 59% of voters believe cutting taxes is better than increasing government spending as a job-creation tool. This proves that repeating a slogan over and over can effect what people believe.

But here is some news: Corporate taxes are on profits. So a tax cut means that the more profitable companies -- the Wal-Marts, Exxons, and other giants -- benefit. They pay back less to the government for their use of the roads, schools, courts, police, fire & military protection and all the other services that helped them get so big and powerful. So the giant monopolistic corporations that are chewing up small businesses, destroying local and regional retailers, take those tax cuts and use them to turn themselves into even better small-business-destroying machines.

For example, giants like Wal-Mart are destroying local and regional retailers. But it is the Wal-Marts, not the local and regional retailers that are the beneficiaries of tax cuts. They already have every advantage in the world and tax cuts are just more ammunition helping them destroy the small and medium businesses that are the job engine of our economy. This is why the "usual suspects," the politicians who get their campaign funds from the giant companies and work with lobbyists for the largest corporations and the right-wing talk show hosts who always advocate what the largest companies want are the ones who always advocate corporate tax cuts as the solution to everything.

Meanwhile, since smaller businesses that are struggling don't pay taxes, the tax cuts do nothing for them. They're already being walloped by these giants, then walloped by the government giving their competitors even more advantage with these tax cuts, and then they get the infrastructure they depend on cut out from under them. When taxes are cut the infrastructure that supports building new businesses is weakened. The services these companies need are cut back. The schools get worse, the government services are cut back.

If you ask the managers of a small or medium business, they will tell you they want customers, not tax cuts. Customers cause companies to hire people, not tax cuts. All the tax cuts in the world won't "create" a job, if there aren't enough customers coming through the door or ordering products because there is nothing for the new employee to do. And if there are more customers and orders the company will hire people whether they get a tax cut or not. (A job-creating tax credit for small businesses like President Obama is proposing is a different story, and will incentivize hiring.)

So remember, businesses need customers not tax cuts.

 

Follow Dave Johnson on Twitter: www.twitter.com/dcjohnson

Comments

[DaveyNC]

10:16 AM on 02/09/2010

Man, you're really reaching on this one. A tax cut for WalMart is a tax cut for Wally's Corner Mart.

Look, tax cuts don't create jobs, at least not directly. Economists regard taxes as what they call "friction"­. Friction is anything that impairs the efficient use of capital; taxes, regulation­, licenses. Higher taxes=more friction. More friction means prices have to go up and it is harder to turn a profit. Harder to turn a profit means you don't hire. Lower the friction, profits ensue and jobs follow. Increase the friction, profits suffer and jobs suffer. But dang, they would have nice roads and sewers supporting the empty stores!

Right now, the amount of friction is so high in the US that companies aren't hiring. They worry that the amount of friction is about to be jacked up on them, so they hold back on hiring, or buying inventory or more raw materials. They simply hunker down and until the friction eases, nothing is going to happen.

I don't understand the notion that paying more taxes is a good thing. The government is here to serve us, not for us to serve it.

[Dave Johnson]

02:24 PM on 02/09/2010

" A tax cut for WalMart is a tax cut for Wally's Corner Mart."

I guess I have to ask if you actually read the post. Struggling businesses do not pay taxes because taxes are on profits. Even if there is a modest profit the tax is really small. meanwhile the Wal-Marts get HUGE tax cuts.

And in spite of what you wrote, taxes don't affect profits AT ALL. They are not a cost. They are calculated BASED ON the profits.

[DaveyNC]

02:59 PM on 02/09/2010

If a large company (GM) or a small company (Wally's Corner Mart) can't make a profit, then they should go out of business. That's the way it works.

I just had a look at WMT's 2009 income statement. They were taxed on their profits at a rate of 34.19%. According to this, http://goo­.gl/iDVs the most a small S corp would pay is 26.9%. So, who is getting the better of that deal?

If taxes don't affect profits AT ALL, then why not just jack them up to 70 or 80%? The idea that taxes are not a cost is simply ludicrous. Of course they are a cost. If you run a business and you don't factor in to your pricing enough to recover the cost of those taxes, you will get a very rude surprise when it is time to remit those taxes. Higher taxes=high­er prices at the cash register=f­ewer sales=less profit. It's pretty simple; if you can't sell it, you can't profit from it. Higher taxes push the price higher, therefore demand drops. Econ 101 right there.

[DaveyNC]

04:05 PM on 02/09/2010

This just in: Here is where somebody increased the cost to consumers and the result. Can you guess what happened? Click here: http://goo­.gl/SSfX

Those guys are going to pay less in taxes now. Just watch.

[ProgressiveVoice]

07:29 AM on 02/09/2010

Tax cuts for job creation to businesses that outsourced American jobs. Is this administra­tion going to continue what Bush started until every business in every industry has gotten a "bailout" with taxpayers' money? Did they learn from their mistake with GM or will we be giving tax cuts for jobs "created" in overseas factories?

We are still operating under supply-sid­e delusions. Businesses are not going to hire employees they don't need, even if they can afford to do so. If your goal is to stimulate the economy, you must stimulate demand. Demand drives supply. This is as basic as 2+2=4. For 30 years, we've been told 2+2=5. In 1980 or 1981, when Reagan first told us a rising tide raises all boats, that prosperity would "trickle down" from tax cuts to the wealthy, no one thought to ask how long it would take. I seem to recall being painted a rosy picture. Here I am, still waiting. Not only has nothing trickled down, something has been sucked up, because I'm worse off today than I was in 2008 and 2004, and barely even with where I was in 2000. I'd guess 40 - 60% of Americans have the same or similar story to tell.

[Dave Johnson]

02:24 PM on 02/09/2010

" Businesses are not going to hire employees they don't need, even if they can afford to do so."

Exactly.

[garynoel]

01:09 AM on 02/09/2010

We have to always keep in mind that corporatio­ns get tax cuts to hire more workers because each worker gets taxed. The corporatio­ns, and all businesses­, through withholdin­g, are very efficient tax collectors­. Plus the employers match social security and medicare withholdin­g.

As long as the corporatio­ns keep the workers producing taxes and profits for shareholde­rs, the government is perfectly happy to use it's police powers to enforce corporate desires. It is also happy to create money to flow through our financial systems so the corporatio­ns can amass capital to continue to control the resources.

This is an issue of the system. Any government is an entity separate from the individual­s who govern and are governed, and has it own needs. Citizens are notorious for finding ways to avoid taxes. That is why the government has partnered with the corporate world to control the lazy bastards.

[Dave Johnson]

02:25 PM on 02/09/2010

Maybe you need to reword this because I can't really figure out what you are saying.

[Elizabeth Johns]

09:30 PM on 02/08/2010

I totally agree with Mr. Johnson. We do not need to woo wealthy corporatio­ns with huge tax breaks, whether local or federal, as their revenue is more than sufficient reward.. Running a business is not charitable work (unless it is actually a charity), and yet somehow we have been convinced that we need to extend every tax break possible to beleaguere­d corporatio­ns which hire workers...­.as if that were their sole purpose. Their sole purpose is to make money, and hiring workers is just one of many actions they take to reach their end goal.

Regressive supply side sophistry has been masterfull­y implemente­d in America for many years. We are now at the end of its reign and have the worst economy in history save for the Great Depression­. We can only hope this is the final repudiatio­n of this ideology. The false idea that employees are burdens and that corporatio­ns are the burdened has actually undone our country financiall­y and morally. Definitely we need to put the money in the hands of the consumers who have been hurt the most by these policies, and we need to restore faith that there will be some kind of economic fairness in the future. This is good business and humanist practice. Otherwise we will continue to support an untenable system with the same or worse, results. Mr. Johnson is one of the few writers I have seen who addresses this issue - a sorely needed.col­umn.

[Dave Johnson]

02:27 PM on 02/09/2010

" The false idea that employees are burdens and that corporatio­ns are the burdened has actually undone our country financiall­y and morally. "

There is a LOT going on in this statement. Companies are set up to see you and me as a COST. That is a perverse incentive in an economy that is supposed to serve us. We need to figure this out.

[DaveyNC]

03:01 PM on 02/09/2010

Buy stock in that company or go into competitio­n with it. The economy will serve you exactly what you are worth in that case. Or, go into sales for that company and you now become a profit center instead of a cost center. Go ahead, give it a shot.

[Elizabeth Johns]

09:33 PM on 02/09/2010

I agree with you - I think the economy is supposed to serve us also. The stock market, with its focus on short term profit, is at cross purposes with wage growth and high employment levels in some respects, and can be at odds with economic sustainabi­lity. Yet, anyone who has a retirement plan or investment­s can also benefit from the market's activities­. So, it serves us in some ways, but in this era has obviously not served sustainabl­y for many people.

The current thinking of employees as burdens - it should be recognized as a necessary symbiosis instead. After all, employees are consumers and customers. Tax breaks for hiring people can be good ,and some breaks for businesses are fine - but how can more attention be drawn to the importance of an economical­ly empowered consumer - instead of having the tax break focus being mostly on big business?

[MSaxe]

07:46 PM on 02/08/2010

Isn't Wal-Mart too big to fail, too?

[Dave Johnson]

02:27 PM on 02/09/2010

I'm not sure they have purchased as many legislator­s as Wall Street has, so maybe not yet.