How Obama’s Asian Job Bill Works

Monday, July 6, 2009

According to President Obama, everything his administration proposes either reduces the deficit or increases employment. His stimulus “puts people to work, doing the work America needs” and Obamacare, well that’s going to save trillions in the budget. Cap and trade is no different according to Obama. The President calls it a jobs bill. I couldn’t agree with Obama more on this point, Cap and trade will create a massive amount of jobs in Asia. The only downside is that it will kill millions of jobs in the US. All taxes kill jobs.

I’ll start by giving you a couple of real-life examples. Hav-A-Tampa, a cigar company, announced that it is closing one of its oldest cigar factories and will be sending 500 longtime employees to the unemployment line. The reason you ask? Recently, Obama signed a 700 percent tax increase on tobacco. This caused demand for cigars to fall, which in turn caused a need to reduce costs or go out of business. The manufacturing of the cigars is going overseas. If you’re on the left you’re probably clapping despite the fact that we are in a recession and any job loss is bad news.

If you think cigar jobs are evil, then what about jobs at Microsoft? Upon news in May that Obama was proposing a draconian tax policy on foreign profits, Microsoft announced:

“It makes U.S. jobs more expensive…We’re better off taking lots of people and moving them out of the U.S. as opposed to keeping them inside the U.S.”

Here is a common sense question: If you make US jobs more expensive than the rest of the world, where will jobs be going?

It’s a well known fact in the realm of economics that taxes kill jobs. There are whole fields of study regarding the topic known as tax incidence. The principle behind tax incidence is that the entity that a tax is levied against is not necessarily the entity that pays for the tax. I can write a bill saying that a company must pay half of each employee’s payroll tax, but that doesn’t mean the money is coming out of company profits.

Here’s how tax incidence works:

A tax is like a wrecking ball swinging in the direction of three entities; businesses, consumers, and workers. The slowest one to move gets hit.

Let’s use payroll taxes as an example. I am Barak Obama and in order to provide everyone with a green TV, I’ve decided to increase payroll taxes. I know you are concerned, but don’t worry, I’m not going to tax any individual. I’m going to tax the evil corporations and I’m going to hit them big time, because workers have been pushed around. So to make my plan Pay-Go friendly, I’m raising the payroll tax five percent on every employee and mandate that companies pay the tax. Everyone on the left cheers and goes to the store for their TV.

Taxing is not that simple, because businesses, in particular corporations, are not people. They are an entity and they have the ability to pass the costs off elsewhere. They have three choices: pay the tax and reduce profits/increase losses, pass the costs onto consumers, or cut costs in the same proportion as the tax. Any one of those solutions is possible, but in this day in age, it’s almost always cut payroll costs.

Why? Well remember, it’s the slowest entity that gets hit with the tax. In today’s global economy, it is employees who can’t move out of the way. Fifty years ago we had the most productive, educated and well trained work force. Plus business outside the US was complicated. However, today India, Korea, China, Japan…etc all offer a similar labor force for much less cost. Coupled with the fact that the number of alternative products available to consumers is innumerable in the global market and the American worker doesn’t have a chance when new taxes are introduced.

Tax incidence is the cake and the icing is the fact that by levying any tax the government creates economic waste. I wrote a post a few months ago about how all government spending creates economic waste. That concept works at both ends of government activity; levying taxes and government spending. The official economics graph is below.



The graph shows the economic waste created from a sales tax or VAT. The economic waste is denoted by the orange and purple triangles. Please note: this does not depict tax incidence.

So please. I don’t want to hear anything negative from the alarmists on the right regarding Obama’s jobs bill. There are many unemployed in Asian countries and it should be Obama’s job to find them all a US job.

13 comments

innominatus said...

The Asians may be laughing at our colossal stupidity when it comes to CO2, but when we're so strained by taxes that we can't afford the trinkets manufactured in Asia will they still think it is funny?

July 6, 2009 at 3:34 PM

Great post Consgen! Simple concepts come to my mind reading this. Cause and effect. Supply and demand. The balance of a scale. All simple notions jettisoned by our government. All done at our peril and the forgoing of our prosperity. Check back later at LCR for a post on a piece from Bloomberg........Kevin Hastert nailed it.

July 6, 2009 at 5:20 PM

Innominatus,

Maybe in the short run, but Obama is dismantling the US economy and these guys aren't going to hold our hands all the way down the free fall. If this continues Asia will somehow take the place of the US and Europe and they'll manage without us.

LCR,

Thanks! I'll be sure to check it out. Simplicity is one of the best arguments against cap and trade. If you need 1,300 pages to lay it out, there is no way you can succeed.

July 6, 2009 at 7:08 PM
TAO said...

I own a company that manufactures apparel and I made it through the 90's and NAFTA...and was proud to be MADE IN THE USA until October 2008. That was when the mills that I buy fabric from went out of business due to their loss of credit lines. Then this in turn led to supply chain disruptions which forced three manufacturing plants I used to shut down.

Now, I subcontract out to Honduras, that makes me about a 15% greater profit margin, gross, but most importantly its the only place I can get product. Taxes really had nothing to do with the demise of apparel manufacturing in the US....because all of the firms that I mentioned all benefitted greatly from various state, local, and federal programs....what killed them was poor planning, reliance on credit, and lack of innovation and adapting to new realities. They lost their competitive advantages years ago when they allowed their size and political favoritism run their businesses....entitlement has been an expectation of our business world for a long time too...

July 6, 2009 at 8:30 PM
Andrew33 said...

You know that when Obama talks about creating jobs, it is implied that they be government or union, right?

Microsoft, used to be part of MSNBC, formerly owned by Bill Gates, not the most conservative of fellows if memory serves. Actually my memory does serve because I am not using windows:0)

July 6, 2009 at 8:56 PM

Tao,

Great reminder. Propietors are often the engineers of their own undoing. However, you have proven tax incidence in your example. It's not a matter of a tax is passed and automatically you start cutting, although sometimes it is. It exists because of the psychology of those running businesses. When you see your margins decrease you look to cut costs. As you well know, there is no shortage of outsourcing opportunities in the world and so cutting labor happens often.

When I working in the mortgage industry our margins slipped because we lost bargining power with our customers. As a result, we looked to outsourcing many of our operational functions.

Cap and trade is particularly repressive because they are raising your energy bills. You won't be able to do anything about it without major costs associated with upgrading facilities, which as you know you have no control over that in the short term.

Andrew,

Usually, but I'm fairly certain in this case he's looking to create Asian jobs.

July 6, 2009 at 9:40 PM
Andrew33 said...

Those are to make up for the jobs Asian companies will lose when Obama bans Toyota and Honda to save GM and Chrysler union jobs.

July 7, 2009 at 1:54 AM
Andrew33 said...
This comment has been removed by the author. July 7, 2009 at 11:21 AM
Andrew33 said...

C-Gen, I have yet to hear from NC on whether he will take me up on my offer. It was late when I wrote it, and he may work a dayjob so he may not have had time to respond. I am sure he will respond. (except for the fact that all he has done until now is tried to debunk everything I have written and now that is no longer on the table) Who wouldn't take an opportunity to get a free post on a blog that is quadruple the size of theirs. If I said you get a free post on the "manifesto" wouldn't you take it? Especially one that caters to the "other side". Give me a chance to do a post on the KOS and I'd take it in a heartbeat, right????

July 7, 2009 at 11:22 AM

Andrew,

I agree, but his debate is obvious, which is why I challanged him to come up with a study to prove his points. I was expecting something like the ICCP to be his response. The ICCP report was actually debunked by our very own EPA. Here's the report.

http://cei.org/news-release/2009/06/25/cei-releases-global-warming-study-censored-epa

I wanted to debate him on it, but blogging time is short and I simply don't have the time to chasing after arguments all day. It's smart to make him lay out his evidence. It's always easier to offer and accusation than to make an argument.

July 7, 2009 at 1:05 PM
The Law said...

I do agree with this, but in a more... fiscally conservative model, how the the government generate a significant amount of revenue? I don't think you can simply cut programs left and right because that has an adverse effect on people... it'd have to be done in carefully planned phases. Even then, it still may not make up the difference. So if not by taxtation, how does the government make money?

July 7, 2009 at 8:37 PM
Andrew33 said...

Cut programs and private enterprises come rushing in to fill a void in the market.After hurricane Ivan, all the trees were down in Pensacola. the Govt cpuldn't handle it so thousands of tree cutting businesses sprang up overnight

July 8, 2009 at 1:07 AM
Andrew33 said...

What that guy does is says he wants a debate, then smarts off, then says he wants a debate, then smarts off again. Up until the final time I went to his blog, "Diogenes" was the only name caller. The final time, NC was name calling as he didn't want to fix his blog. (That's a Liberal for you) but I am not, I did on KOOK's exactly what I asked him to do as a show of good faith and what do I see there but more name calling. I would never ask another person to do something I am not willing to do. Now NC permanently relegated to comments and I am not exactly "motivated to even answer him or her or it.

July 13, 2009 at 9:26 AM

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