Thursday, December 2, 2010

Disingenuous Small Business Owners Or Are They Altruistic?

Even this week, there have been news reports quoting a small business owner or two, who claim they need tax cuts or tax credits in order to hire a new employee.

Tax credits and tax cuts are nice. But do they really motivate me to hire another person? Aren't they more like the jelly on the bread? It's the bread that nourishes; the jelly's just a garnish. Similarly, a new hire generates more revenue, more profit; the tax credit is just a bonus.

Let's put some numbers to it. Suppose you have a chance to gain $100,000 more in revenue. You can't with your current staff. You need one more person. It's going to cost $50,000 for wages and benefits to bring on this person. The additional business will also cost $10,000 in additional materials or service expenses. There's no additional overhead needed or any other expenses for equipment, tools, computer station, etc.

If you hire the person and get the additional business, you're making an additional $40,000 in profit. Suppose you pay 30% in corporate taxes. $28,000 stays in the corporate coffers or your pocket. Suppose a proposed tax break drops the corporate rate to 25%.

If you believe some quoted small business owners, they would turn down $40K in profits, $28K in net income unless the federal government ensures that the $40K means $30K in net income. They would turn down $100K in revenue, $40K in profit because they wouldn't be allowed to keep a few extra thousand. Let me have their business. I'll take the extra income, hire the person and wouldn't blink an eye about the tax rate.

Let's look at another case. There's no potential for new business. Why would a small business owner hire someone...maybe to stand around. His costs are going to go up. Use the numbers we had above. His costs will go up $50,000 for the new hire. That means his profits drop by $50K. He'll pay $16K less in taxes. Some business owners in the news claim that they would suffer the loss by hiring someone if they could get a tax break. With the tax break, they would pay $14K less in taxes on the lower profits. Mr & Mrs Small Business Owner hypothetically pay $100,000 in taxes last year, and had a net income of $200,000. By hiring a new person, they would pay $80,000 in taxes, and only have a net income of $170,000. By asking for a tax break, and still hiring the extra person, they would pay $62K, and have a net income of $188,000. The tax break makes a difference here. Net income is still reduced. But how many business owners are altruistic, would hire someone just to reduce the unemployment ranks and take a hit on their net income?

The key is getting the extra revenue. Of course, if a new employee would allow Mr & Mrs Small Business Owner to get more business, they would hire...with or without tax breaks.

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