Take it from me -- a small business owner and "job creator."
-- From the Dec. 4 PG Perspectives piece by Cynthia Barber Gale titled "Tax Cuts Don't Create Jobs."
I've owned a money management company since 1995. Some politicians call me a "job creator." They say that unless we extend the Bush tax cuts for the richest 2 percent of Americans, small businesses like mine will be hurt. They're right.
I've never had a problem with the term "job creator." Obviously no sensible businessperson (unlike some politicians) wakes up and says: "I think I'll create some jobs today." Job creation doesn't work this way, in a vacuum.
Business owners create jobs when they can profitably meet demand for goods and services. Jobs are not an end in themselves, but a means of creating value for customers, which in turn creates profit for business. If there is no profit, there is no job. So I create jobs for my employees because I want to earn a profit. Simple enough.
Because I deduct employee costs from my taxable income, any increase in labor costs must be offset elsewhere if I'm going to maintain my income. Similarly, any increase in income taxes must also be offset. If I expect my after-tax income to fall by 6 to 8 percentage points as a result of a coming tax increase, I'm going to try to find ways to either grow my sales by an offsetting amount, or cut my expenses.
Given that the economy remains in a half-baked, deflationary recovery supported largely by federal borrowing and money printing, the prospect of higher revenues is iffy at best. So with the fiscal cliff looming, I'm going to husband my cash and keep new expenditures to a minimum. If we go over the cliff, I'll adjust accordingly.
I'm not the only person thinking this way. Numerous economic surveys over the past six months show increased pessimism on the part of business owners, managers and consumers. New orders for capital goods have declined steadily since mid-2010, and the rate of decline has accelerated in recent months.
A Gallup index measuring hiring intentions on the part of small-business owners recently plunged to levels matching the all-time lows of November 2008. The National Federation of Independent Business index of hiring intentions also remained weak in November, with just 4 percent of owners planning to increase employment, unchanged from September and 6 points below the August reading.
Finally, the University of Michigan index of consumer sentiment fell to 74.5 in December, after a reading of 82.7 in November. This was well below consensus, and almost entirely due to a fall in the economic outlook index -- from 77.6 to 64.6. This is the largest drop in the outlook index since March 2011 and reflects concerns surrounding the fiscal cliff: One quarter of consumers, when asked to identify economic news they had heard recently, mentioned potential tax increases.
These are the facts; higher taxes mean fewer private sector jobs.
One can argue over whether increasing taxes on only the very highest earners (rather than the next 5 percent or 8 percent down the income scale) has less of a discouraging effect on overall job creation, but the direction of the vector is indisputable. One can also argue for higher taxes on the basis of greater economic "fairness" or increased public investment. These are two of many valid political and social reasons for encouraging a different distribution of the spoils of private wealth creation.
Discussions in Washington over the next three weeks will doubtless focus on these issues. But don't fool yourself; by definition, we're talking about carving up a smaller pie, not about making the pie bigger.
Charlie Smith is a principal and chief investment officer for Fort Pitt Capital Group (email@example.com).