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RE: tax cuts for small business owners-
According to economist Robert Frank from Cornell, the answer is a resounding no. Tax cuts to small business owners do not stimulate employment. Here’s the argument. Suppose that a potential hire will produce 10 units of output per hour for a firm and the output will sell for $2. The worker can be hired for $15 per hour. Should the firm hire the worker?
Yes, hiring this worker will generate a $5 profit per hour for the employer. Let the tax rate on the owner’s income be 20%. Then the take home pay for the owner is $4 per hour.
Now increase the tax rate to 50%. Is it profitable to hire the worker? Yes, the worker still generates $5 in profit for the firm, but now the owner’s take home pay is $2.50.
Now let the tax rate be 80%. Is it profitable to hire the worker? Yes, the worker still generates $5 in profit for the firm, but take home pay for the owner is only $1 now (assuming this is still above zero economic profit for the owner).
Notice how the condition determining whether the worker is hired, a comparison of the wage paid to the value of the output the worker produces (W compared to P*MP from your principles courses), does not depend upon the tax rate paid by the owner.
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