In today’s Mount Pleasant Morning Sun is a column by Eric Baerren, the editor of the Michigan Liberal website and before that news editor of the Morning Sun itself. In it, he argues that business tax cuts don’t “drive” job creation because a “business doesn't look at its tax bill and say, "Hey, a break, we can hire more people."
Baerren is correct that tax rates alone do not drive job creation. As he suggests, that happens when investors, entrepreneurs and managers think they can make money by adding more workers. Tax rates are just one part of an imprecise and ever-changing formula that determines this, one that is unique for each firm.
Baerren is wrong, however, to deal tax rates out of that equation, and his example shows a simplistic interpretation of how managers and entrepreneurs actually think about these things.
A much better explanation of their thinking was provided several years ago by the son of two real world entrepreneurs, commenting on testimony presented before a legislative committee on a tax proposal that would have saved the average small business $540 per year. Big Government proponents were marshalling arguments similar to Baerren’s against that modest tax cut (as they do against every business tax cut). The entrepreneur’s son explained it as follows:
"More times than I can count, I saw my parents take a fraction of money just like that tax cut and make some leap of logic about how they could generate a profit from it. Something like: ‘Hmmm, $540 would pay two months of the lease on a new service truck. That almost makes it worth doing, which means hiring another driver/service technician.’ The idea may or may not have made sense before the tax cut, but the extra jingle in the pocket makes you start thinking."
A footnote to this story: The Mackinac Center for Public Policy is not an organization that ignores unusual talent and perception. At the time, that entrepreneur’s son was serving as a legislative staffer, a position for which someone this economically literate was obviously unsuited. His name is Ken Braun, and he is now employed by the Mackinac Center as the managing editor of Michigan Capitol Confidential.