How Obama’s Asian Job Bill Works

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.