[zanny]

The new hire puts you up a tax bracket, and you lose profit to gain productivity.

Your immediate finances can't support adopting a new hire or division because tax proceeds from your profit margin limit your growth potential.

If you can immediately make a return on a new hire, with instant productivity gains and immediate bottom line improvements, yes, you absolutely make the hire. But that doesn't always happen, and in major skill movements across the labor market it never happens. You need financial capital to invest in broadening or transitioning your business rather than just increasing labor to meet more demand, principally because in this modern age it is easier to automate increased demand (circumstantially, but frequently) than to hire more workers to cover it. IE, if your market grows 10%, you might as well invest in a contracted software team to automate your systems to enable your current labor staff to be 10% more productive than to hire 10% more people.

[nbouscal]

That's not how tax brackets work. Tax brackets in the US are marginal, which means that the increased rate only applies to income above the threshold. It is impossible for an increase in income to be accompanied by a larger increase in tax burden.

(I guess I should mention that the Business degree came with a Professional Accounting option.)

[thaumaturgy]

I'm also a small business owner -- have been for several years now. I also have a number of business clients, and I'm active in my local business community. On this point, you're wrong.

Taxes are not my biggest concern, demand is. Same for my clients, down to the last one.

> The new hire puts you up a tax bracket, and you lose profit to gain productivity.

Not if you're sensible about how you price your product or services. Hiring should increase your profit, not decrease it; when you see businesses making cost-cutting layoffs, you're seeing adjustment caused by either a decrease in demand (sales & revenue) or by mismanagement ("fiefdom hiring").

> Your immediate finances can't support adopting a new hire...

If the phone started ringing off the hook right now I could afford a new hire within a week or two.

> ...because tax proceeds from your profit margin limit your growth potential.

Taxes aren't due until the next quarter. I suppose they "limit my growth potential", but so does every other business expense, including payroll. Hell, if I didn't have to pay anybody, I would have infinite growth potential!

> You need financial capital to invest in broadening or transitioning your business rather than just increasing labor to meet more demand

I think you are conflating a couple of different things here.

Taxes don't have a practical effect on capital for a successful business. Lenders and investors are happy to work with businesses that can provide ROI. Increasing labor to meet demand is something you do in parallel with other growth strategies, but for small businesses, they can often do just fine hiring an extra employee or two to meet demand without having to organize enterprisey growth strategies.

> principally because in this modern age it is easier to automate increased demand (circumstantially, but frequently) than to hire more workers to cover it.

what?

This is contrary to what I hear from every single one of my clients. Every one. I can see it being true in certain, specific cases -- certain industries, certain types of business maybe -- but as a generalization of all businesses in America, it is wrong.

I think you need to go and talk to a couple of local restaurant managers and feed them these lines. See what they think.

> IE, if your market grows 10%, you might as well invest in a contracted software team to automate your systems to enable your current labor staff to be 10% more productive than to hire 10% more people.

And spend more money on the contractors than you would on an equivalent number of employees, have a questionable long term support plan and/or ownership of the software, spend money on staff training, and, best of all, wait a minimum of six months to a year straining under the weight of increased demand (and pissing off all of your existing and new customers in the meantime) while the software gets built and then debugged and documented.

Put your theories to the test: run a business.