Let’s say your company has a pre-tax profit of $5,000,000 and you pay 30% in federal taxes and now that rate drops to 22%. Your net profit has gone from $3,500,000 tp $3,900,000. That’s not bad and now you need to do something with that $400,000.
Before you make a commitment, there are things to consider. How is business? Are you in a growth mode, are you struggling? Do you need new equipment or new advertising that you can now afford? What are your profit projections for next year? And then there is the biggie, can you count on this tax rate lasting?
The fundamental question is should you commit spending this windfall on a recurring expense that once committed to will compound and over which you will have virtually no control in the future?
None of that matters to some people and some groups; their view is simplistic, limited and shortsighted … and risky. And designed to propagandize.
Let’s say workers get a $4,000 raise. Does four thousand multiplied by the number of workers come from that net profit windfall? Not exactly.
You have SS and Medicare taxes of 7.65% plus FUTA 0.6% and assorted state payroll taxes that vary greatly, but can add another 0.5% to over 5% of pay. To that we may add 3% for the typical 401k match or if lucky 6-8% to fund a pension. So on average that $4000 raise actually cost the employer more like $4,440 and growing.
The $4,000 referenced below is pie in the shy political rhetoric from the White House, we all know that, except perhaps many average workers and people receiving the below e-mail. But that’s not the point. The point is, what appears simple is far from it. What appears a windfall may or may not be and may be lasting or fleeting. To ignore all that and simply say, “we want more” is what got the auto industry and others in trouble (including currently many states).
I’m all for workers sharing in the collective value they help create, but as they are not typically willing to share in the risk as well, that sharing needs to be tempered. Imprudent raises today may lead to layoffs or downsizing in the future. An overly costly workforce forces more and more automation.
There needs to be a balance and flexibility. One way to do that is through annual profit sharing. Some profits are shared with owners and workers, but reflect changing circumstances in amount.
To simply demand higher pay based on changing tax rates only is foolish … and I suspect the AFL-CIO knows that too. 🤑