Friday, September 10, 2010

Taxes & Small Businesses

Arguing that the sunset of the previous administration's tax cuts for those earning more than $250k net will hurt small businesses & job creation seems a bit of a stretch. Here's a post on the subject on Growthology. Be sure to read the comments, in particular note the following remark: "Wouldn't the fact that pass through profits are taxed at a high rate encourage reinvestment? If we want businesses to hire then pulling money OUT of the business should be discouraged."

And here is a letter to the editor of the Wall Street Journal from this morning:
Your Sept. 3 op-ed "The Small Business Tax Hike and the 97% Fallacy" by Kevin A. Hassett and Alan D. Viard makes a misleading argument about small businesses in order to justify borrowing $700 billion to finance the extension of the Bush tax cuts for the wealthiest 2% of Americans.

Messrs. Hassett and Viard concede that 97% of small businesses will pay nothing more in taxes under the president's plan to allow the Bush high-income tax cuts to expire on schedule. Yet they argue that even if only 3% of small-business owners would be affected, this small fraction reports a large amount of what they term "small business" income.

The problem with their argument, however, is that it counts any type of partnership income, sole proprietor income, or S corporation income as small-business income. Thus, they count as small-business income profits that go to a partner at a major law firm or hedge fund. Our analysis indicates that small-business owners under this definition, who would be affected by allowing the top two rates to increase as scheduled, have an average gross income of over $1 million. Keeping the Bush tax cuts in place for these taxpayers would not likely result in additional job creation, and it would add significantly to federal budget deficits and debt.

The experience of tax policy over recent decades clearly demonstrates, and the Congressional Budget Office has confirmed, that tax cuts for the highest-income Americans—regardless of whether their earnings are classified as ordinary or small-business income—are not an efficient way to stimulate the economy or create jobs.

Michael F. Mundaca
Assistant Secretary of Treasury for Tax Policy
Treasury Department

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