A Small Business Surcharge

By May 16, 2008Taxation

Amid all the exchanges of outrage in the House yesterday over funding of troops in Iraq, we highlight one bad idea that did pass: A targeted tax increase on small businesses and employers to pay for veterans education benefits.

Specifically, by a vote of 256-166, the House approved an amendment to the supplemental appropriations bill that would impose a new .47% tax on S-corporations and other individuals with more than $500,000 in adjusted gross income in order to fund expanded education benefits to veterans.

Here’s how The New York Times described the vote: “House Approves Tax on Rich to Aid G.I.’s” If by rich, you mean small-business owners who file as an S-corp, that’s accurate.

As the NAM’s Key Vote letter explained:

The NAM strongly supports efforts to honor the veterans of our nation and to provide them with education benefits. However, we believe that the amendment’s expanded benefits should not be paid for by the small businesses most responsible for creating jobs and growing the economy. To raise taxes that would harm the economy means fewer jobs for returning veterans.

Twenty-seven million small businesses – including about 50 percent of the NAM’s members – operate as S-corporations or other “flow through” entities. They pay taxes at the individual rate and would thus be subject to the tax increase the amendment would impose. Levying a .47 percent additional tax on individual incomes over $500,000 would have a negative impact on these companies. Higher taxes on manufacturers, especially at a time when the economy is contracting, means there will be less money for business expansion and job creation.

Used to be that politicians dared only talk of funding new government spending by “repealing the Bush tax cuts for the wealthy.” Now it’s taxing the wealthy. What’s the next shift going to be?

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