About Those Tax Cuts...

The 2001 and 2003 Bush tax cuts are set to expire and a debate about which if any to extend is heating up in a time amidst concerns about a weak recovery and a booming deficit pulling in opposite directions. Republicans want to retain all of the tax cuts, while the Democrats want to retain tax cuts for low and middle-income earners and eliminate them for the top two tax brackets. Republicans say this will hit small businesses that file as individuals and thereby the people they might employ, Democrats say it will target the wealthy who have accrued a greatly increasing percentage of wealth in recent decades.

The Brookings Institution and Christian Science Monitor try to get a sense of who is right. Only about 2.5% of businesses that file as individuals would be affected under the proposal offered by President Obama -- to allow tax cuts to expire on income over $200,000 for individuals and $250,000 for couples. But these 2.5% of businesses make up almost 50% of business income as shown here and in more detail here (note: these data are broken down by type of business -- most high earning small businesses file as S corporations or partnerships, while most lower-earning businesses file as sole proprietorships). Most of these high earning businesses are professional service providers (investors, lawyers, doctors, dentists etc.) or small chains.

So would higher taxes on the most successful small businesses retard job growth? The evidence on that is mixed according to Brookings. And there is a danger in the other direction as well; the government borrowing necessary to finance continued tax cuts at a time of deep budget deficits could crowd-out these businesses looking to borrow. And, as the past few years have shown us, lack of access to capital undoubtedly retards hiring.
SSDAN Office

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