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Business Growth Does Not Mean More Jobs

This article published in The Economist in part validates the recent post about whether or not cutting taxes will improve hiring. Basically, this chart says that, even when businesses are doing well, as they have been over the past couple of years, they are not hiring.

Should be believe that cutting taxes (allowing the businesses to increase profits) will encourage them to hire?

Can Tax Cuts Create Jobs?

Before answering the question in the title of this post, let’s define a tax cut.  Tax cuts are the lowering of the rate of taxation for a group whether it is people of a certain income, purchasers of gasoline or businesses.

A 1% tax cut just means that, if the tax was originally, say, 6%, it would be dropped to 5%. Simple enough.

Now to the question of whether tax cuts can create jobs.  Let’s answer that by taking looking first at jobs.  Jobs are engagements that people have to do or make something and get paid for doing or making it. These things are usually done or made because the employer can sell it and make a profit.

Taking an example, let’s look at a small coffee shop in a neighborhood.  The owner hires people to man the counter and keep the store running.  The owners find that, on average, they can expect 500 customers daily and their staff of 8 can handle that perfectly and they turn a profit.

Now, let’s say the coffee shop’s tax rate is 25% and with that and all the other expenses, the owner makes an income for himself of $100,000.

Tomorrow, the government introduces a 10% tax cut for businesses.

The owner now has a choice to make: he can increase his income by $20,000 or hire an additional staff member to serve coffee.  Which would he do?

Considering the store is adequately staffed to handle the business that comes in, he would probably take the extra pay and put it away in his child’s college fund.

The only way he would hire another staffer is if his business picked up.

So, take this example and apply it to Starbucks Coffee, McDonald’s, WalMart or any other business.  Are they going to automatically hire more people because they receive a tax cut and not because they have more work (more customers)?

Today we have high unemployment which means less people have money to buy things.  This means that Starbucks and McDonald’s probably have less customers.  So, they probably don’t need to hire more people.

Therefore, a tax cut for businesses probably won’t get them to hire more people.  But it will probably add to profit and make the stock take off.

Coincidentally, if you follow the stock market, it has been up the last two years while we have been in a recession.  I think we know the reason why.

Do Unions Hurt Small Businesses?

Mitt Romney put out a video in which a small business owner relates his story of how a union bullied his company because his employees didn’t want to organize.  Here it is:

This video raises some questions:

• Are unions better for employees of large businesses rather than small businesses?
• Do unions today help employees in any business?
• Do employees really need collective bargaining?  Does it benefit them?
• Perhaps most importantly: Is it possible to align management and labor interests?