Does the new tax bill provide more incentives to give workers raises… or less?

Let’s talk about the incentives in the new tax bill for employers to raise workers pay.

Here is a concrete example. Say I own a small bar where people come and drink beer after work.  Suppose I gross (on average) $1,000 per day in sales, the bartender gets paid $4,000 per month, I spend $10,000 per month on other fixed costs and $8,000 per month on beer, so I gross $5,200 in monthly profit.

Now let’s say that the bartender gets a raise of $500 per month. The net profit I take home (as the owner) only declines by $325, because when my profits go down, my taxes, which are a percentage of profits, also go down.

Now the world changes! Corporate tax rates decline from 35% to 22%. In this new world, my monthly profits are $6,240 (instead of only $5,200). But, when the bartender gets that same $500 per month raise, it costs me $390 (instead of only $325).

So, how exactly do I have more of an incentive to give people raises?

Tax rate 35% 22%
Monthly sales 30,000 30,000
Bartender 4,000 4,000
Beer 8,000 8,000
Rent and fixed costs 10,000 10,000
Gross profits 8,000 8,000
Taxes 2,800 1,760
Net profits to owner 5,200 6,240

After giving the bartender a raise of $500 per month:

Tax rate 35% 22%
Monthly sales 30,000 30,000
Bartender 4,500 4,500
Beer 8,000 8,000
Rent and fixed costs 10,000 10,000
Gross profits 7,500 7,500
Taxes 2,625 1,650
Net profits to owner 4,875 5,850

Despite what Republicans might say, this tax bill will lower employers’ incentive to give raises and bonuses to workers. This applies to large corporations as well. For example, Walmart proudly announced raises (still not to the living wage threshold), while quietly closing dozens of stores. Ultimately, the real winners under the new tax regime are business owners, not workers.

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