Tahlequah Daily Press

December 11, 2012

Higher taxes for rich won’t hurt small businesses

Guest Columnist

Tahlequah — The Republican leadership is adamant about refusing to go along with any deficit reduction plan that includes an increase in the federal income tax level for households with taxable incomes above $250,000 a year. Supposedly such a measure would somehow negatively impact small businesses and therefore radically harm the economy.

It’s my understanding this is because many small firms are organized for tax purposes as so-called “pass-through entities.” A pass-through entity pays no taxes directly. Instead, its profits are distributed to its owners, and they pay income – but not payroll – taxes on the proceeds.

There’s a difference between profits and revenues. No federal income tax is levied on revenues that are used to pay business expenses such as employee salaries, raw materials, overhead and investments in new equipment. What’s left over is profit, which is taxable.

Federal taxes are levied on marginal income. That means the rate applied to profits over $250,000 would be irrelevant to the first $250,000 of taxable income. If you have $250,010 of taxable earnings, then only that last $10 would be taxed at the higher rate. This might actually encourage a small business owner to invest more of his revenues in his business – maybe by hiring another employee, rather than taking it as income to avoid the tax bite.

The arguably non-partisan Congressional Joint Committee on Taxation in June of this year found that just 3.5 percent of small business tax filers would pay a higher rate in 2013 – about 940,000 individuals, many of whom are lawyers and doctors in partnerships. Interestingly, those few percent account for 53 percent of all small business income.

Bottom line: I can’t find anything that indicates rolling back the Bush tax cuts to Clinton-era levels for the top two tax brackets would have any impact on 93.5 percent of all small businesses, or turn a previously profitable small business into something unprofitable. It does appear that those few who would be affected are making a great deal of money and not creating new jobs with it.

This view is supported by a 1989 paper co-authored by Martin Feldstein, chief economic adviser for former President Ronald Reagan, who found that the 1983-’84 recovery was caused mainly by an expansionary monetary policy and was unrelated to reductions in the personal income tax rate.

Similarly, the Congressional Research Service, a nonpartisan analysis group run by the Library of Congress, recently reviewed 60 years of economic growth and changes to the top marginal tax rates for both personal income and capital gains and concluded that “the reduction in the top tax rates appears to be uncorrelated with saving, investment and productivity growth.”

So exactly what is it I’m missing? Please note the question relates purely to economics, rather than partisan political ideology.

Jim Bone, a former Tahlequah Daily Press managing editor and local law enforcement officer, recently retired as an information analyst with the United Nations.