12/06/2010 03:34 pm ET Updated May 25, 2011

Stuff and Nonsense about Taxes

As the in decade of the 1970s was ending a one-time Saturday Night Live comic deadpanned an ongoing routine that he introduced as follows:

Well, the "me" decade is almost over, and good riddance, and far as I'm concerned. The 70's were simply 10 years of people thinking of nothing but themselves. No wonder we were unable to get together and solve any of the many serious problems facing our nation. Oh sure, some people did do some positive things in the 70's -- like jogging -- but always for the wrong reasons, for their own selfish, personal benefit.

Well, I believe the 80's are gonna have to be different. I think that people are going to stop thinking about themselves, and start thinking about me, Al Franken. That's right. I believe we're entering what I like to call the Al Franken Decade. Oh, for me, Al Franken, the 80's will be pretty much the same as the 70's. I'll still be thinking of me, Al Franken. But for you, you'll be thinking more about how things affect me, Al Franken. When you see a news report, you'll be thinking, "I wonder what Al Franken thinks about this thing?", "I wonder how this inflation thing is hurting Al Franken?" And you women will be thinking, "What can I wear that will please Al Franken?", or "What can I not wear?"

You know, I know a lot of you out there are thinking, "Why Al Franken?" Well, because I thought of it, and I'm on TV, so I've already gotten the jump on you. So, I say let's leave behind the fragmented, selfish 70's, and go into the 80's with a unity and purpose. That's what I think. I'm Al Franken."

I think of this old routine almost every time I hear current discussions of taxes. The universal request of every imaginable group is to extol the virtues of not taxing me. Raise the incremental tax rate on the poor overtaxed upper 2 percent of income earners? No, they will retaliate by not hiring new employees. It is straight out of the 1979 Al Franken routine: want good things to happen to the economy? Just lower my taxes. If you raise them, "small" business will not hire. (Just like oil companies will tell us how taxing energy will strangle the economy. And soft drink companies will extol the threats to our freedom if ingesting their chemical concoctions were to become incrementally more expensive).

All of these arguments seem individually plausible until you note the common theme of naked self-interest.

Now, I'd like to see my taxes lowered as much as anyone. But the arguments advanced to the effect that they will cause high income taxpayers to retaliate by not hiring new employees make no sense. There is a complete disconnect between my personal experiences in running a business for three decades and the arguments I have seen advanced in the current debate. At the very least, they fail to distinguish between gross revenue (which is not taxed) and profits, which are taxed. Joe the Plumber obviously did not understand this difference, but any real business will.

Let's take a small business with $10 million in revenue and $1 million in profits as an example. Not the image conjured up by the term "small business"? Well, think again, "small businesses" include businesses a lot larger than this.

We are told that failure to extend the Bush era tax cuts will prevent these businesses from hiring. Let's examine this claim. The current top tax rate is 36 percent. If we fail to extend the Bush era tax cuts, this will increase to a whopping 39.6 percent, a nominal 3.6 cents on each additional dollar of profit. (But not even on ALL of the profit, just the profit in excess of $373,650 since high income taxpayers still get the benefits of lower brackets for everyone. So their additional tax is about $22k on a million of profit.)

We are asked to believe that these businesses will no longer have the money to hire new employees if they don't get to keep these 2.2 cents on the dollar. Really? Let's look at two scenarios:

Scenario #1:
Owner takes the million in profits and either pockets the profits or spends it on a lavish extended foreign travel vacation involving lots of first class travel (all on foreign airlines) and extended stays at five star resorts. Tax consequence: he has to pay about $320k in taxes on the $1 million of company profits used to fund his vacation (less if he owns a home or has other deductions). So the poor fellow only has about $680k for his vacation.

Scenario #2: Owner spends the $1 million on new employees to expand his business. A dollar of profit spent on an employee is no longer profit, it is a business expense. His taxes are zero, since he no longer has any profits. And no proposal by anyone has ever considered changing this accounting fact.

So how does any tax on profits inhibit the hiring of additional employees? In fact, quite the opposite is true. Incrementally higher taxes on profits actually are a slight incentive to hire additional employees. It costs a company in the 40 percent tax bracket about 60 cents to pay $1 in additional wages.

But I wouldn't make too much of this modest incentive. In thirty years of running a business, taxes on profits have never played any role whatsoever in decisions to hire new employees. Not ever. Why? We hire new people when our workload requires it. And for no other reason. And I find it hard to imagine any rational business making hiring decisions on any other basis.

This is not to say that other taxes cannot impact business decisions under some circumstances. For example, property taxes and employment taxes must be paid regardless of company profits. And an argument can be made that high business property taxes create a disincentive to the attraction of capital intensive industries, such as manufacturing. Since these are often pay high wages, this can be a counterproductive strategy for local development officials.

The top incremental tax rates were as high as 91 percent when Eisenhower was President. To argue that a top tax bracket of 39.6 percent will inhibit hiring makes about as much sense as the claim that it would transform our capitalist economic system into socialism. That argument is so ludicrous that it might even make the self-obsessed 1979 Al Franken character blush.