Thoughts on Tax Cuts

Tony, the question you ask assumes that there's only on thing that can happen when you mess around with taxes.  The point I constantly try to make is that there are different effects.  Before, we spoke about whether someone would decide to work more or less when he was taxed more (someone who's not necessarily a business owner).  My point then was that there's an income effect (he wants to make his car payment, so he'll actually work more if he's taxed more), and there's a substitution effect (which pushes him to work less, if he's taking home less each hour, then leisure gets "cheaper").

In this particular case, focusing only on businesses, we're both now on the other side of the argument.  Before, you were arguing that the hourly worker would work less when he was taking home less money per hour.  Now, you're arguing that a business owner will work more (by firing the help) when he's confronted with taking home less per hour.  As before, I don't think that the business owner's actions are that easy to predict.

There are a couple of fairly strong forces at play.  First off, I don't think you can ignore the fact that a salary is something that's not taxed on the business' end.  If the tax on the business, or the business owner, is higher relative to the tax on what the worker takes home, keeping workers on starts to make more sense.  Think about it- if you have some menial task, like cleaning, and assume that the business owner is as good as the professional cleaner (unlikely), he can either pay $50 to the cleaner (who will keep, say, $40 after taxes) to do the job, or he can do it himself, pay tax on that $50 and keep $25 for himself.  Also, if you're talking about businesses that produce things (like Pepsi making cans of soda), you can usually put together some equation where an employee can produce x cans per hour.  Pepsi should hire employees as long as they're producing cans of soda that are worth more than their hourly wage.  Since the business doesn't pay tax on the money that is paid to the workers, a change in the tax rate won't change the optimal number of workers.  I think that's a hugely important point that gets glossed over all the time.

Let me go off on a bit more of a tangent here:  businesses are always (theoretically at least) making profit-maximizing decisions.  A restaurant doesn't charge $15 (instead of, say, $20) for a steak because it's being nice, it charges $15 b/c it thinks that particular price will yield the most profit (after considering the cost of buying the meat, paying employees, etc., and estimating the number of customers that it will have if the steak is set at $10, $15, or $20).  It frustrates me when people say that businesses can no longer "afford" to sell tacos for $.50, or whatever else.  If they were doing it before, it was either calculated to help the business or the decision makers are retards (and actually breaking the law if there are shareholders).

Finally, I will concede that higher taxes can slow investment.  I don't think that it (higher taxes) makes it more likely that a business will fail, but investors are essential bettors- if there's more taxes that's like a bigger house cut on the bet, so the sharper ones will be less likely to invest.