Obama, Small Business and Taxes

On July 9, we heard a lot from the White House about tax cuts, including for small businesses. Was any of this rooted in actual, sound tax and overall economic policies, or was it simply a case of political spin?

Unfortunately, but not surprisingly, it was the latter. In particular, when you read the material on the White House’s website, it’s overwhelmingly rhetoric rooted in class warfare politics.

President Obama’s emphasis was on extending for a year the Bush tax cuts for those earning less than $250,000, and pushing the idea that only three percent of small businesses would face tax increases under this plan.

This was nothing new from President Obama. And again, the obvious question is: Why raise taxes on anyone, especially in a long-struggling economy?

After all, as noted in a July 2010 analysis on some of the President’s proposed tax increases, the nonpartisan Joint Committee on Taxation reported the following on higher personal income tax rates: “The proposal also results in increased marginal tax rates on upper income taxpayers (as is provided for by the present-law sunset of EGTRRA), which will correspondingly reduce incentives for these taxpayers to work, to save, and to invest. Opponents of this latter aspect of the proposal often note that many small businesses, and a large fraction of small business income, will be adversely impacted by an increase in the top two tax rates. The staff of the Joint Committee on Taxation estimates that in 2011 just under 750,000 taxpayers with net positive business income (three percent of all taxpayers with net positive business income) will have marginal rates of 36 or 39.6 percent under the President’s proposal, and that 50 percent of the approximately $1 trillion of aggregate net positive business income will be reported on returns that have a marginal rate of 36 or 39.6 percent.”

It’s worth repeating: 50% of net positive business income will be directly impacted by these higher tax rates.

For good measure, a 2008 analysis from the Treasury Department pointed out: “About 81 percent (about $27.3 billion) of the total $33.8 billion in tax relief this year from lowering the top two tax rates will be received by flow-through business owners.  Individuals with more than 30 percent of their income from flow-through businesses receive 44 percent (or about $15.0 billion) of the total tax relief from lowering the top two tax rates.” Those entrepreneurs will be hit by the Obama tax increase.

How can any of this possibly be good for small business and the economy?

Consider also that the biggest challenge for small businesses is to get the capital needed to grow. That capital comes from investors. And it’s higher income investors that have the resources to undertake such ventures. And those include angel investors, who often are successful business owners who reach out to support and invest in start-ups.

Again, how could raising taxes on such individuals possibly be beneficial to the entrepreneurial sector of our economy?

The President, of course, chooses not to address such issues. Raising taxes on upper income earner is a political strategy, again rooted in class warfare, that cannot be justified on the basis of sound economics.

In the end, one must ask: Where would these resources be put to the best use? Is it better to leave them in the private sector, where entrepreneurship, innovation, economic growth and job creation occur? Or, is it best to take such resources from those who earned them, and hand those dollars over to politicians?

On the President’s proposal, an analysis on the White House website proclaims: “This should be one of those rare moments where everyone in Washington can agree.” Indeed, this is a moment where agreement should be strong. But not in favor of the President’s proposal. Instead, agreement should stand in favor of making the 2001/2003 tax relief measure permanent as a start, and then building by implementing pro-growth tax and regulatory relief that will spur risk taking and the economy forward.

Raymond J. Keating is the chief economist for the Small Business & Entrepreneurship Council.