Taxes and Regulations Kill Jobs

People start businesses to provide products or services to their customers in exchange for set prices. The price for any product or service is selected by the business owners to provide good value for their customers while providing the owners with enough profit to compensate them for the effort of running that business. Price should be higher than the cost of production but lower than the value customers get from using the product or the service.

Business tax is a cost and when any of the costs of production rises the business has to adjust to the rising cost by either cutting other costs, raising prices or accepting lower profits. Lower profits may drive businesses to close especially newer businesses that still have loans to pay and accordingly too sensitive to any profit loss. Raising prices may cause businesses to lose market share and lose profit when their customers move to cheaper alternatives. So, in reality, the only option that businesses have is to cut their costs to stay profitable and competitive.

A business can cut costs by reducing the costs of labor through relocating some or all of its operations to a foreign nation with lower labor and regulatory costs. It can also cut costs by using different suppliers who produce their products overseas with lower costs and offer lower prices accordingly. Another way to cut costs is to invest capital to automate more processes which reduces production costs.

So the real victims of high business taxes are workers who cannot move to different countries to keep their jobs and end up unemployed. As the Tax Foundation explains in a recent post, labor is the least mobile factor in production so it gets harmed the most by higher taxes.

Regulation is also a type of tax and over the last 30 years, taxes and regulations took a major toll on the American manufacturing jobs. The following diagram shows the growth of manufacturing industrial production in the United States over the past 30 years vs. the drop in manufacturing jobs. The graph uses 1986 as a reference year with value 100:

The diagram shows that the manufacturing output has almost doubled over the last 30 years while the number of manufacturing jobs is about 70% of the level at 1986. What happened over the past 30 years is a combination of all the cost reduction factors outlined earlier. Manufacturing of products such as clothes and small electronics moved overseas to use cheaper labor while the production of higher value products such as cars and industrial equipments became more automated.

Business taxes don’t redistribute the wealth or create a better society, they punish workers and kill their jobs. So when a politician claims that business taxes and regulations are good for the economy, remember all the manufacturing jobs lost in the United States and vote against him or her.