SBE Council Pleased by Passage of Small Business Tax Cut

The Small Business & Entrepreneurship Council (SBE Council) was pleased to see that the U.S. House of Representatives passed the Small Business Tax Deduction Act (H.R. 9) today.

Karen Kerrigan, SBE Council’s president and CEO, said, “Entrepreneurs are concerned about the tax increases due to kick in at the end of this year. Those tax hikes will reduce the ability of small businesses to invest, build and create jobs. In contrast, the Small Business Tax Deduction Act that passed the House, by providing a 20 percent tax deduction to small businesses, shifts the tax policy debate in a welcome, far more pro-entrepreneur, pro-growth direction.”

Kerrigan continued, “Obviously, much more needs to be done on the tax front. That includes eliminating the many tax increases coming next year that pose additional, significant threats to an already poor economic recovery. If we want to reinvigorate economic growth and job creation, then tax increases are the last thing we need.”

Raymond J. Keating, chief economist at SBE Council, added, “Economic and employment growth require that resources be left in the hands of America’s entrepreneurs, as opposed to taking those resources so they can be spent for political purposes. Let’s hope that this vote in favor of lower taxes on small businesses by a majority of members in the House of Representatives will be recognized as the right direction to go on tax policy by the U.S. Senate and the Obama administration.”

On Policy, Timing Matters

A couple of economic facts that I teach about public policy in my business and economics classes: 1) incentives matter, and 2) timing matters.

At the end of this year, we’ll be heading into very risky waters when it comes to both taxes and the timing of tax policy. Economist Arthur Laffer has a piece in today’s Wall Street Journal (“Tax Hikes and the 2011 Economic Collapse”) that warrants reading. While I’m anything but optimistic on our economic future given the looming policy dangers, Laffer is down right pessimistic – and perhaps for good reason.

Laffer, for example, notes the following about the impact of the many tax hikes scheduled for 2011 and beyond:

Now, if people know tax rates will be higher next year than they are this year, what will those people do this year? They will shift production and income out of next year into this year to the extent possible. As a result, income this year has already been inflated above where it otherwise should be and next year, 2011, income will be lower than it otherwise should be.

Also, the prospect of rising prices, higher interest rates and more regulations next year will further entice demand and supply to be shifted from 2011 into 2010. In my view, this shift of income and demand is a major reason that the economy in 2010 has appeared as strong as it has. When we pass the tax boundary of Jan. 1, 2011, my best guess is that the train goes off the tracks and we get our worst nightmare of a severe "double dip" recession.

Incentives and timing very much matter.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council