Taxes, Small Business and Uncertainty

By September 4, 2010Economy, General, Taxation

Two excellent commentaries on taxes, business and the economy…

Kevin A. Hassett and Alan d. Viard of the American Enterprise Institute wrote Friday in The Wall Street Journal, “The Small Business Tax Hike and the 97 Percent Fallacy,” demonstrating that the expiration of the 2001 and 2003 federal tax cuts on individual income would indeed hit small business. The “97 percent fallacy” is a reference to Vice President Biden and House Speaker Pelosi’s argument that the higher tax rates will only affect 3 percent of small business, so what’s the big deal?

The numbers are clear. According to IRS data, fully 48% of the net income of sole proprietorships, partnerships, and S corporations reported on tax returns went to households with incomes above $200,000 in 2007. That’s the number to look at, not the 3%. Would Mrs. Pelosi and Mr. Biden deny that the more successful firms owned by individuals in the top income-tax bracket are disproportionately responsible for investment and job creation?

At National Review’s The Corner, Veronique de Rugy, an economist and researcher at the Mercatus Center, makes the case that the temporary tax credits and rebates that the Administration favors to spur job creation are ineffective. For example, the $1,000 tax credit for hiring — which the President wants to boost to $5,000 — is useful only if a small business has a tax liability, much less likely given the current economic climate. In her post, “More on Small Business and the Administration,” de Rugy writes:

If the administration were so eager to help businesses, large or small, it would end the constant public-policy uncertainties that businesses are facing: The health-care overhaul, which will bring new but still unknown obligations to insure employees, and legislation aimed at tackling climate change, which could raise businesses’ energy costs, add to the uncertainty about the economy. The new financial regulation, which will take years to put in place, adds its share of uncertainty, as does the potential expiration of the tax cuts. Meanwhile, as government spending increases, so do the chances of more taxes in the future.

Her arguments about the deleterious effects of uncertainty dovetail well with the conclusions of the National Association of Manufacturers’ 2010 Labor Day report, “Labor Day 2010: The Impact of Anti-Labor Policies on Working Men and Women.

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