In a letter to the editor in today’s Wall Street Journal, Assistant Treasury Secretary Michael Mundaca argues against Kevin Hassett and Allan Viard’s Sept. 3 op-ed claiming that small businesses will be hit by raising individual income tax rates.  Mundaca writes:

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… 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.

So, what we’re quibbling with here is the definition of small-business income.  Mundaca is arguing that a small business with gross income over $1 million isn’t small.  We’ve made the point over and over that manufacturers are capital intensive – one manufacturing press alone could cost $1 million.  Frankly, a small manufacturer with only $1 million in gross income is small!

But, we’re flexible.  If it makes folks feel better, we’ll call them “medium-sized” businesses.   It doesn’t change our position though.  We think that raising taxes on a “medium sized” manufacturer with $1 million in income (which incidentally, would be a $35,000 tax increase) is a bad idea.  And we think it will hurt job creation.

From The Wall Street Journal, “Obama Tax Plan Holds Less for Small Business” (subscription):

Small manufacturers in particular may benefit given that many rely on industrial-size machinery to function. In 2009, small and midsize manufacturers invested an average of $1.4 million in factory equipment, down from $2.3 million in 2008, according to a survey of the National Association of Manufacturers, a Washington, D.C., trade group with 11,000 members.

But Dorothy Coleman, vice president of tax and domestic economic policy for the National Association of Manufacturers, warns that other new legislation that the president has proposed could thwart any relief that the equipment write-off option may provide to small companies. “Potential tax increases on businesses could neutralize the benefits of the provisions,” she says

President Obama speaks in Cleveland this afternoon to discuss the economy and offer changes in the tax law to encourage business investment and job creation. Jay Timmons, executive vice president of the National Association of Manufacturers, appeared on a Fox Business segment Tuesday discussing President Obama’s sudden flurry of economic proposals.

You have to look at all the components of the proposal, and I’m afraid we haven’t seen those yet. Taken in isolation, the President’s proposal to create 100 percent expensing for property, plants and equipment over the course of the next 18 months, to expand and make permanent the R&D tax credit, those things are good, not only for manufacturing but for businesses in general. The problem is, we haven’t seen the other shoe that’s about to drop, and that is tax increases that are likely to be part of the proposal…

The expiration of the 2001 and 2003 tax cuts will have a serious impact on the some 70 percent of the small manufacturers that file as S Corporations, paying the individual income tax rates, Timmons argued. 

“By not extending all across the board the individual tax rates, that harms manufacturing and that also hurts their ability to expand, invest and create jobs,” he said.

The Hill, “Reid plans September showdown on extension of tax cuts“: ” Senate Democrats will hold a September showdown over trillions of dollars in expiring tax cuts passed under President George W. Bush.” 

AP covers Treasury Secretary Geithner’s speech at the Center for American Progress on Wednesday, in which he disavowed the economic value of maintaining lower tax levels, “Geithner: Extending tax cuts for wealthy a mistake.”

At Shopfloor, the  NAM’s Dorothy Coleman explains in rebuttal that the term “wealthy” also includes many, many, many small businesses and manufacturers who file as S Corporations.

AB Stoddard of The Hill mentions the NAM in this column, “Battle over tax-cut data“: “Democrats are in a corner on the tax-cut debate, and they know it. If they follow President Obama’s plan and allow tax relief for the top earners to expire, they get blamed for the ‘biggest tax hike in American history.’ But if they extend more than $3 trillion in tax cuts, most of them originally voted against in 2001, they get blamed for the biggest deficit in history.

New York Post, “The people speak: Keep Bush tax cuts“: “Americans by a wide majority want to extend former President George W. Bush’s tax cuts, and more than half believe that letting them expire will further hurt the country’s shaky economy…Fifty-four percent said they wanted the Bush cuts to stay in effect, according to the Rasmussen survey of 1,000 likely voters taken Aug. 1 and 2.”

Bloomberg, “New Jersey Voters Want Spending Cuts Over Higher Tax Following Budget Deal“: “New Jersey voters support lower spending over higher taxes by almost three to one after the state passed a budget which cuts funds for welfare, mental health and in-home nursing care, a survey shows. The state should ‘hold the line[' on spending even if that results in cuts to 'many' programs, according to 60 percent of the respondents to a Fairleigh Dickinson University PublicMind survey, released today [Aug. 4]. That compares with 22 percent who say the state should raise taxes to support services if necessary.”

Los Angeles Times, “San Diego to do the unthinkable: seek a tax hike“

The Senate is currently debating a bill (H.R. 5297) that would extend bonus depreciation and expand a small business loan program. The Manufacturers have no problem with these provisions, and in fact, we’ve been on the record supporting both.*

Unfortunately, this isn’t enough for some folks. To be honest, it gets a little tiring to hear rhetoric claiming that we are “leaving small business behind” or that “small business is being held hostage by partisan politics.” The reality is that passing this bill at a time when small businesses are facing trillions of dollars in new taxes in less than six months is sort of like buying new furniture for someone facing foreclosure. 

In a recent survey conducted by RSM McGladrey, more than 85 percent of small- and medium-sized manufacturers said they were concerned about increased tax rates –- with 61 percent reporting they were very concerned.  By not acting, Congress will be increasing the top rates for small business owners to nearly 40 percent, increasing the estate tax to 55 percent, and nearly tripling the tax on dividend income.  One can logically ask: Exactly who is leaving small business owners behind?

* The National Association of Manufacturers joined this coalition letter and this one in support of extended bonus depreciation. The NAM is a member of the Small Business Access to Credit Coalition, which last week sent this letter to the Senate urging support for extending and improving SBA loan programs.

Taking a break from the health care debate Saturday, the House of Representatives adopted three bills on suspension that had the words “small business” in their titles.

• H.R. 3737, Small Business Microlending Expansion Act of 2009 (Rep. Ellsworth – Small Business)
• H.R. 1838, To amend the Small Business Act to modify certain provisions relating to women’s business centers. Rep. Mary Fallin (R-OK) issued a news release.
• H.R. 1845, Small Business Development Centers Modernization Act of 2009 (Rep. Schock – Small Business)

Front page, Washington Post, “U.S. to cut pay for bailed-out bosses“:

NEW YORK — The Obama administration plans to order companies that have received exceptionally large amounts of bailout money from the government to slash compensation for their highest-paid executives by about half on average, according to people familiar with the long-awaited decision.

Page 16A, Washington Post, “Rescue efforts shift to small business”:

The Obama administration is winding down several massive rescue programs that aided large banks and automakers during the heat of the financial crisis, while launching more moderate initiatives to help small businesses and the housing market….

The Troubled Assets Relief Program, or TARP, will now focus on the ailing housing market and small businesses, which are seen as vital to the economic recovery because they employ so many workers, officials said.

The Obama Administration has identified a real problem, the lack of credit for small business, and it’s good the White House is searching for solutions.

But we now know that accepting TARP money brings with the federal government’s control over the most basic of business decisions, such as the setting of compensation. If you’re a small business owner offered government financing under TARP, you’d have to be skeptical.

Maybe the salary won’t be an issue, but who knows what other strings might be tied to the aid? A neutrality agreement on union organizing? The parceling out of reserved parking spots?

UPDATE More from John Hinderaker, “Cut Their Pay and Send Them Home.” He writes: “One of the basic problems with the ever-increasing intrusion of the federal government into our economy is that questions that should be economic become political. What becomes most important is not providing the best product or service at the best price, but having the most pull in D.C.”

From Rich Karlgaard, publisher of Forbes, a column highlighting the role of small business in promoting recovery, and what happens if entrepreneurship lags. Form “Recession Relapse?”

If our apparent third-quarter economic recovery proves weak and relapses into a second recession, the causes will be:

–Small businesses, constrained by lack of expansion capital and fearful of possible regulatory changes in health care, energy and union membership, sit on their hands and don’t hire.

–Unemployment creeps above 10% and stubbornly stays there.

–Because small businesses can’t or won’t expand, commercial real estate values sink more than expected.

–Regional banks with lots of commercial real estate paper on their balance sheets fail by the hundreds.

In other words, a second leg of recession will occur if America’s small-business sector doesn’t expand.

Karlgaard promotes the idea of a Founder Visa to encourage the immigration of entrepreneurs, but that’s a long-term approach. In the short- and medium-term:

Most existing small businesses don’t need assistance from the government. What they need is across-the-board relief on taxes. They need benign legislation (or no change) on health care, energy and unions. A wish list, in other words, that runs counter to everything the Obama Administration is currently trying to pass.

That sounds like what you might call “a growth agenda.”

(Hat tip: Instapundit.)

Congress is not in session today so the schedule for committee hearings next week is already published here. Two we find of immediate interest.

• Senate Committee on Commerce, Science, and Transportation: October 6, Subcommittee on Competitiveness, Innovation, and Export Promotion, to hold hearings to examine promoting export success for small and medium-sized businesses, 2:30 p.m., SR-253.
• Senate Committee on Banking, Housing, and Urban Affairs,October 9, Subcommittee on Economic Policy, to hold hearings to examine restoring credit to manufacturers, 9:30 a.m., SD-538.

A topic of much concern, the credit issue. From Bloomberg today, “Whitney Says U.S. Rebound Hampered by Small-Business Loan Curbs“:

Oct. 2 (Bloomberg) — The U.S. recovery will falter as banks continue to curb lending to small companies, said Meredith Whitney, whose 2007 prediction that Citigroup Inc. would cut its dividend triggered a plunge in the bank’s stock.

“Access to credit is being denied at an accelerating pace,” Whitney said in a commentary in the Wall Street Journal. While large companies have no problem obtaining loans, small businesses “have never had a harder time,” she said in the article, dated yesterday.

Except, except, except…

L.A. Times, “No middle-class tax increases, White House insists“:

White House Press Secretary Robert Gibbs adamantly and repeatedly insisted today that the president remains committed to his pledge — though he was unable to explain why Geithner and Summers had strayed from the administration’s line.

“The president’s clear commitment is not to raise taxes on those making less than $250,000 a year,” Gibbs told reporters pressing for an explanation about apparent discrepancies in the White House’s message.

Gibbs added, “I hope you’ll take my reiteration of this clear commitment . . . in the clearest terms possible, that he is not raising taxes on those who make less than $250,000 a year.”

Except for small-businesses that file as S Corporations. That seems like a pretty big exception.

From the National Association of Manufacturers’ news release and statement from NAM President John Engler, July 23, “NAM Disappointed by President ‘s Endorsement of Massive Tax Hikes on Small Manufacturers.”

WASHINGTON, D.C., July 23, 2009 — In response to President Obama’s statement endorsing House legislation that would impose a tax surcharge on small businesses to pay for health care reform, National Association of Manufacturers (NAM) President John Engler issued the following statement:

The NAM is disappointed with President Obama’s endorsement of a tax on small businesses to pay for health care, as proposed by the House of Representatives in America’s Affordable Health Choices Act (H.R. 3200).

The President and the Speaker have called for a new tax that would hit incomes above $1 million, but the reality is that this would impose a nine percent surtax on small manufacturers. Nearly 70 percent of manufacturers are organized as S-corporations or some other type of “pass-through” entity. When Congress decides to increase taxes on individuals, it is actually hitting small businesses and their ability to compete and create jobs.

Manufacturers are hit especially hard by these tax increases because of the intense capital demands of modern manufacturing. A small manufacturer’s revenue is not take-home pay. It is the money needed to pay workers, provide benefits — including health care (97 percent of NAM members offer health care) — and invest in equipment.

Adding a surtax onto individual rates that are already expected to rise means that federal tax rates will skyrocket to nearly 50 percent for these manufacturers (with state taxes adding even more burden). (continue reading…)