Would ending the Bush tax cuts on the rich hurt small business?

04 Aug 2010

Posted by Edmund L. Andrews

For politicians, being "for'' is like being for mom and apple pie. That's why President Obama invited two restaurant owners named Pancake and Wheat to the White House in June to promote a bill to increase small-business lending, and why he recently visited with local business owners at the Tastee Shop Shop in Edison, N.J.

So it was probably inevitable that small busines would end up at the center of the war over extending the Bush tax cuts for the top 2 percent of households with incomes above $250,000. Republicans claim this would be a disaster for small business owners, because "50 percent'' of small business income would be "captured" by the higher tax rates. Democrats say that's baloney, because only 3 percent of small business owners make enough money to be in the top bracket.

Who's right? Over at the Fiscal Times, I dissected the issue. Short answer: the Republicans are right, but only if your idea of "small business'' includes income from hedge fund investments, royalties, real estate partnerships and that trust fund your rich grandfather left you. Here are the details:

According to the Joint Tax Committee, which analyzed President Obama’s tax proposal, taxpayers will report $1 trillion in business income on their individual tax returns in 2011. And just as Republicans claim, about 50 percent of that income is expected to be reported by people in the top two tax brackets.

But there is a big difference between “business income’’ and the small-business profits. Business income includes profits from real estate, royalties and limited partnerships for anything from real estate and oil drilling to venture capital and private equity funds. It also includes income from estates and trusts – so trust-fund babies are a part of the mix.

Put another way, much of what Republicans equate with small business income is investment income earned by wealthy people who hold stakes in a wide array of ventures.

Indeed, the Joint Tax Committee cautioned that the figures “do not imply that all the income is from entities that might be considered ‘small.’”In 2005, it noted, more than 6,000 partnerships and 12,000 “Subchapter S’’ corporations (which allow owners to report profits on their individual returns) had revenues above $50 million.

But the United States has about 1.5 million small businesses, and the vast majority of business owners earn modest incomes. According to the Joint Tax Committee, only 750,000 people – about 3 percent of those who report positive net business income – would be affected by the higher rates.

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You're forgetting second order effects

And what about all the small businesses that support the small businesses owned by the rich? How much is their income going to drop because of the taxes you cheer on leaves your envy targets with less money to invest in their businesses?

And what about the taxpayers who work for those small businesses but aren't owners? Some of them get to be laid off, take pay cuts or forgo raises because of the taxes you want to rip from those you've decided don't deserve the fruits of their labor. Aren't salaries paid to employees of small business just as much "small business income" as the profits that the owners eek out?

Your idea that tax increases on the rich don't affect the non-rich is laughably naive, and disgustingly driven by envy.

Posted by Yet Another Budget Wonk on Aug 4th, 2010 at 11:51 pm.

Yeah, lack of investment is what's strangling small business

YABW, you seem to be under the impression that lack of investment capital is a constraint on small business growth.

If you *ask* small business owners (I am and have been one, to the tune of tens of millions over the decades; you?), they'll tell you that it's the *last* thing on their list of business constraints.

http://www.asymptosis.com/the-sky-is-falling-business-lending-down-1-2-p...

http://www.asymptosis.com/do-wealthy-investors-create-growth-and-prosper...

http://www.asymptosis.com/businesses-constrained-by-lack-of-investment-o...

Utopian libertarian theories based on (cherry-picked pieces of) "textbook" economics are nice stories. But 1. We know how utopias have turned out over the centuries, and 2. they're uniformly contradicted by the facts on the ground.

Posted by Steve Roth on Aug 5th, 2010 at 12:03 pm.

You really ought to read your links before you post them

The first one is talking about loans and interest rates. I was talking about small businesses plowing profits back into the business.

Ditto with your second link.

And with your third.

But what you didn't notice is that two of your three links noted *taxes* as small business' biggest worry. Funny how you missed that.

Posted by Yet Another Budget Wonk on Aug 5th, 2010 at 2:57 pm.

Growth, Growth, Growth

Everyone is looking the wrong way. Progressives are looking backward at how many people who were small-business owners were in the top tax brackets. The other side is looking at how much small-business income was in the top tax brackets. What is important the future and how many small businesses that intend to grow and increase production and employment expect to be affected by the higher future tax rates. Any business owner that intends to significantly grow does not expect to end up in the middle brackets. Also, small business that grow become bigger businesses. Many former small businesses that have grown are no longer classified as "small". Small-business is also affected by the taxes of their investors and lenders (as well as suppliers, clients, customers, etc...). Raising the top tax rates will increase the costs of capital and financing needed to grow.

Posted by TDM on Aug 5th, 2010 at 12:45 am.

I'm afraid I file this post

I'm afraid I file this post in the dog-bites-man category. It's pretty clear that the Republicants are interested in protecting the rich and not small businesses, and will do anything to distort the issue so that they deliver the goods to their campaign contributors.

Posted by a on Aug 5th, 2010 at 4:14 am.

Business Tax Increases

You are also ignoring the 3.8 percent surtax that will be introduced by the Obama health care bill. Thus, the marginal tax increase on business income earned outside Subchapter C Corporations will increase from 35 percent to 43.4 percent. That is the largest increase in my memory. While additional tax revenues are needed to close the budget deficit, this may not be the most economically efficient way to do it, particularly if one is concerned about job growth. Needless to say, Obama needs to go the other direction on entitlement growth.

Posted by Vivian Darkbloom on Aug 5th, 2010 at 1:41 pm.

Many former small businesses

Many former small businesses that have grown are no longer classified as "small". Small-business is also affected by the taxes of their investors and lenders.Raising taxes will definitely problem to small business owners.
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Posted by marlynn on Aug 6th, 2010 at 9:14 am.