[Shaudius]

Originally <a href='/showthread.php?p=15482394'>posted</a> on 07/26/2012:

I know that taxes are paid on profit you dummy.

That's funny because for at least a half dozen posts you've been arguing a position that shows you don't know this simple fact.

You are saying that firms reduce net income by adding labor.

If i pay you 45k and you make me 50k....

yes my profit is only 5k. But didnt my profit increase by 5k?

how did my net taxable income decrease from this?

Your net taxable income did not decrease, it increased, but its unknown if the overall economic impact of your profit was positive or negative. The only positive effect is the net growth of the economy. Not the individual firms net growth(since this growth often comes at the expense of other firms, see below). Its a zero sum game is the problem. It gets complicated, but maybe you can follow along below(but I have my doubts with the amount of times I had to explain that income taxes are levied on profits).

your claim was that the government makes less money when firms add labor because firms make less profit when they add labor. How???

If i pay you 45k you make me 50k... i have 5k extra profit that government can tax me on. Also, the government now makes tax revenue on the new employees 45k.

How did government make less money?

There are a couple different scenarios, the first is that you did take a loss to hire the employee, in that scenario the employees income tax rate is most assuredly lower than your business income tax rate, although there are situations where this might not be the case. And yes firms do sometimes take a loss to hire additional employees, for a variety of reasons.

The more likely scenario is that you made 5k profit in addition, but that doesn't mean the government gained 5k in taxable additional revenue. Remember that business losses are deductible, as are a number of other losses on personal income tax. In this scenario your business gained 50k revenue, and paid an employee 45k, but you must remember that 50k didn't come from no where(same with the 45k you pay the worker). Whatever portion of that 50k came from a business is written off, it reduces their tax burden. So the net effect is offset. Whatever portion of the 50k came from consumers who can not write it if is properly characterized as growth in the economy for which additional taxes are collected. But that 50k came from somewhere initially, so either the money supply has increased, its money that was spent with you instead of someone else(meaning its not actually a net positive to the economy), there was an increase in production in the money supply devaluing the currency, or it came from net exports, or additional natural resource exploitation. Those last two are the only ways in which the economy actually grows.

So ultimately my argument is that additional units of labor in the workforce does not necessarily mean that the economy grew, and if the economy grew, it depends on how the increased growth is offset by reduced rates.

Note this is just from a purely tax revenue standpoint, I'm not arguing that additional workers in the workforce is inherently bad(its good) but its not the only thing to consider when trying to figure out if its a net positive for tax revenue.