I've been struggling lately with the intellectual issue about how taxes actually impact productivity, economic growth, job creation, and return on investment. I was an economics major in college, so if there's an easy answer, I've forgotten it. Any feedback that anyone can provide to my questions / intellectual exercise would be much appreciated.
Let's start with the basic hypothesis that any changes in taxes have an impact on take home income. So if taxes increase by 1% at your highest marginal rate, then your income at that rate is reduced by 1%. So, if you make $100k per year, and $50k is subject to the highest rate, then a 1% increase in the highest rate would reduce take home pay by $500.
So here is my question - let's say that you're in an environment where you can impact your income, at least marginally, by working more or less hours. If you earn $100k by making $50 per hour for 2,000 hours a year, let's say that if your taxes went up by $500, you would work an extra 13 hours (or whatever the needed increase is) to make up the extra $500 in take home pay that went to taxes. Is it a reasonable argument to say that people may care more about their "net" income than their "gross" income, so that if taxes went up, they would actually work more to keep their "net" the same? And if that is the case, would the inverse be true (where a decrease in tax rates would actually HURT economic activity since people would work less and take home the same amount)?
Let's say our hypothetical worker is a Ford employee making cars. If he and all of his co-workers all work an extra 1% in hours and produce 1% more cars, does that have any impact on the price of cars. Do they cost slightly less since there are slightly more, and some of Ford's costs for that employee and plant are fixed, so they can charge nominally less and still have the same aggregate margin? So even though there are 1% more cars, they still all sell since the $50 lower price tag encourages that 1 extra sale?
In a second example, how much do taxes actually play a role in whether a company decides to hire additional workers? I would assume that businesses base their decisions on whether to hire additional workers based on an ROI calculation - if the ROI is sufficient, they hire someone. If taxes increase across the board, then the expected ROI for all investments, after taxes, would necessarily decrease, and the "hurdle rate" might be set lower since other investment opportunities are also less attractive. Considering any additional salaries and benefits to be paid to a new employee are an expense, as long as the revenue generated by the employee (or cost savings) are greater than the employee's salary, doesn't it make sense to hire that person, regardless of whether that "profit" from the new employee is taxed at a 35% of 40% rate? If I can hire someone that brings in $100k in revenue and costs me $75k, why would I care whether I have to pay 35% or 40% on the $25k in profit -- it's all "found" money at that point.
I'm sure there's something I'm probably missing, so I look forward to someone pointing out my logic fallacy based on real world experience instead of my "book" example.
Thanks!