Tax Increases on Small Business

The President’s new CEA Chairman was on an interview TV show this morning. He supported all Obama policies including the expiration of the top income tax bracket. On Jan. 1, the tax rates facing small businesses are scheduled to jump, as the 2003 tax cuts expire. The top two income tax rates now stand at 33 percent and 35 percent, but would increase to 36 percent and 39.6 percent.

The Chairman said that this is misleading because so few of the small businesses fall into these income tax brackets. However, while only 8 percent of small businesses pay the highest two tax rates, the Treasury Department says those businesses generate almost three-quarters of all small-business income and shell out more than 80 percent of all income taxes paid by small businesses. Increasing tax rates on these businesses will hamper economic growth. Millions of American taxpayers earn a few bucks on the side. Sometimes the extra income is from a lucrative hobby; sometimes the work is more serious. Millions of these sideliners are honest enough to report their earnings as small-business income. But they are not small businesses in the traditional sense. They have no employees. They have no fixed place of business. They do not offer services widely. True small businesses have employees. They invest in machinery. They offer goods and services widely. And the successful ones earn significant sums to compensate for the risks of running the business. Typically these businesses plow earnings back into the business so it can expand further by investing more money and hiring more workers. And because they earn significant sums, successful small businesses earn the bulk of small business income. So, while only a small portion of taxpayers reporting small-business income would face Obama’s higher rates, those facing the higher rates are the successful and expanding small businesses that create new jobs the economy needs to grow. According to a survey by the National Association of Independent Business, the businesses most likely to face Obama’s higher rates are those employing between 20 and 250 workers. Raising rates on successful small businesses is a big part of the reason why the Obama tax hikes would hurt the economy.

The U.S. continues to become less and less attractive to business. Corporate taxes are the highest of all developed economies, except perhaps Japan. Paul Otellini, CEO of Intel, says it already costs Intel an extra billion dollars to build a microchip plant in the U.S., rather than overseas. This is an extra 25% to create a $4 billion facility. The expiration of the tax cuts will only make matters worse.