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On Tuesday, the Senate Finance committee held a hearing on tax reform during which Dr. Leonard E. Burman offered an interesting response to the oft-cited connection between hiring and tax rates. He argued that since labor costs are tax-deductible, employers benefit so long as a worker produces as much as the costs of hiring him or her. Demand, he added, is the far more significant factor in a business' hiring decisions and the more serious problem as of late.

This week, President Obama proposed paying for the American Jobs Act with tax increases on the very wealthy, or as the Heritage Foundation puts it: "tax hikes on job creators." This is typical of conservative messaging, dubiously framing all people who earn more than $200 thousand per year as "job creators," and repeating the unsubstantiated claim that moderate tax increases on the wealthy cause businesses to hire fewer workers. The Heritage Foundation cites themselves as the source to backup this claim.

As Dr. Burman argued, US businesses are far less responsive to tax rates than many would have us believe. The non-partisan Congressional Budget Office notes that "increasing the after-tax income of businesses typically does not create much incentive for them to hire more workers in order to produce more, because production depends principally on their ability to sell their products."


The fundamental point about how raising taxes on small businesses would affect hiring is an important one, but the important thing is that labor costs are deductible. So, if a worker can produce as much as it costs to hire him or her, it's worth doing because after tax they would still make money. The big problem small businesses have right now is that there's not demand, it's not the tax regimen. Now, it could have some affect on investment over the long term, but I think all of those affects are, when I read what Mr. Entin writes, I have this feeling that if you believe this you would think that you had to have an absolutely perfect tax system to have the economy grow at all. And if that were the case, we'd be in really big trouble. I think that the fact is that we're much less responsive to tax rates than you might think from these theoretical models.
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