the first few lines:
| size of firms | Firms | Establishments | Employment | Payroll ($1,000) |
|---|---|---|---|---|
| Total | 5,930,132 | 7,601,169 | 120,903,551 | 5,130,509,178 |
| 0-4 | 3,617,764 | 3,624,614 | 6,086,291 | 232,062,907 |
| 5-9 | 1,044,065 | 1,056,947 | 6,878,051 | 222,504,912 |
| 10-14 | 418,270 | 435,392 | 4,892,838 | 166,372,257 |
| 15-19 | 214,871 | 232,071 | 3,604,553 | 127,162,095 |
You will notice that even though businesses with fewer than 20 employees are about 90% of all businesses, it's only 17% of all employees. So while it's true that there are a lot of small businesses, the majority of them are tiny. If these magic tax cuts managed to create 10% more employment in this sector, this is only 2 million jobs. But this is totally implausible. The average employment in this sector is 4 employees. To add a single employee is a 25% increase, and for almost 3/4ths of them a 50% increase or more. How is a 4.6% tax rate cut going to generate enough extra revenue for these businesses to increase payroll 25 or 50%?
The premise that lowering the individual tax rate affects small business hiring is that over 60% of businesses are S-Corporations, meaning that the business doesn't pay corporate income taxes, but passes revenue on to the owner where it is taxed as income. There are a few S Corps that are bigger than 5 employees, but very few. For over 90% of all jobs, a change in the personal income tax rate of their employer has zero effect on how the business is taxed.
The Bush tax cuts had two parts. For incomes under around $350K, all tax brackets were reduced by 3%, while the top bracket was reduced by 4.6%. Then capital gains, which had been taxed at 28%, and dividends, which had been taxed as ordinary income, were reduced to 15%. So who is mostly affected by the Bush tax cuts? Everybody took 3% from their ordinary income under $350K. In 2007, just over 1 million people (of the 140M filers) were affected by the cut to the top marginal tax rate and they had a cumulative AGI of about $2T. Those with incomes under $100K had on average less than 1% of their income as dividends and capital gains, while those with incomes of a $million or more had almost half of their income in these things.
So who is it who benefits from the cuts? Basically three groups: The savings from the ordinary rates are small, but real. If you're making the median $50K, after exemptions and deductions, those 3% are under $1K. If you got a salary of a $million, you got about $40K. If you made a profit selling your house, you may have had a big capital gains windfall. During the bubble, lots of people did. But the real beneficiaries are people who invest in the equity markets: stocks, bonds, commodities and so forth. If you make most of your income this way, and among $million earners, that's most of them, your tax rate roughly halved.
So to our big point: does any of this create jobs? Well, an executive or lawyer who brings in an extra $10K because of these cuts might be able to have a little extra work done: some gardening, a nanny or such. Per person this is not much, but together, a few of these people add up to an extra job. The extra home sales definitely created a market for realtors. It wasn't what caused the housing bubble, but the low capital gains rate surely added a small amount of lift to it. But the big thing is the equity markets. These things create very few jobs. The way they're supposed to work is to provide an incentive to invest in new businesses. That does create jobs. But once the IPO is done, the only work that's generated is for stockbrokers. It creates nothing, and removes money from the "real" economy. During the downturn, there have been very, very few IPOs.
The bottom line here is that tax cuts for the rich have almost no effect on job creation. Not zero, but certainly not enough to justify undermining other types of government job creation.
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