They Say Tax Increases Hurt Jobs

     Economists often deal with marginal costs, the cost of one more.  Tax rates, for example, are marginal tax rates, the tax on one more dollar.  Rational people, generally imagined by economists to be numerous, compare marginal costs and benefits.

     Let's say we let the top tax rate increase from 36% to 39%, as will happen automatically if nothing is done. This will mean the marginal value of earning 10,000 more dollars will drop from 6,400 to 6,100 dollars.

     What is the cost of labor?  The cost of labor will not change.  The company will pay about a 7% payroll tax on 10,000 dollars in wages.  So, for 10,000 an employer will get about 9,300 in work.

     When the tax rates go up, the advantage of hiring more workers increases.  In this case, from 9300-6400= $2900 to 9300-6100= $3200.