With the nation still limping out of a devastating recession, the current hot-button question is whether national leaders should let the 2001 and 2003 tax cuts expire, including those benefiting people making in excess of $250,000 a year. (We have a sign-on letter urging members of the Minnesota Congressional delegation to allow the high-income tax cuts to expire. There is still time to join, as we’ve extended the deadline.)
Central to the debate is this question: What policies best create jobs and get the economy moving? Some argue for letting the tax cuts expire to start to pay down our long-term federal deficits and maintain critical investments in education, roads and health care, important elements for a strong economy.
Others argue that continuing tax cuts for the wealthiest Americans is critical to spur small business job growth. But the data shows that letting the high-end tax cuts expire is a reasonable action, and will have little small business impact. The Center on Budget and Policy Priorities finds that letting the top tax rates return to their pre-2001 levels would have no impact on 97 percent of the taxpayers reporting business income.
There is no universal definition of “small business,” a term that often conjures up visions of a local barbershop, hardware store, mom-and-pop restaurant, or family farm. But these are only a subset of small businesses. For tax purposes, “small businesses” can include law partnerships, lobbying firms, and Wall Street stockbrokers renting out their vacation homes, among others. They may have hundreds of employees…or none at all.
A common thread among the different kinds of “small businesses” is that owners pay business taxes on their individual income tax forms (as opposed to most large corporations, which pay corporate income taxes.) “Small businesses” have a variety of legal structures: sole proprietors, partnerships, subchapter S Corporations (S-Corp) or Limited Liability Companies (LLCs). Each year, these businesses fill out profit-and-loss statements. The owners and/or shareholders report their share of the profit on their individual federal and state income tax forms as “flow-through” income.
The Center on Budget and Policy Priorities says that those arguing to extend the tax cuts to help small businesses “tend to rely on an extremely broad definition of ‘small business.’”
For example, most Americans would not describe the nation’s wealthiest 400 individuals, some of whom are billionaires, as small businesses. Yet the “Top 400″ individuals have a great deal of money to invest and consequently receive significant business income — which means that they qualify as “small business owners” under the broad definition of the term. The 400 highest-earning taxpayers received nearly $17 billion in S corporation and partnership income in 2007…an average of $83 million each, according to the IRS.
The owner of your typical local hardware store, barber shop, restaurant, or family farm is unlikely to be making a net profit of $250,000 a year – which is what would be required to put them in the upper few percent of income earners who would be affected if the federal high-income tax cuts expire. As the name implies, expiring high-income tax cuts affect only very high-income earners.
There are better options to spur the economy than extending the 2001 and 2003 tax cuts. (They include increased aid to the unemployed.) The Congressional Budget Office’s January 2010 report Policies for Increasing Economic Growth and Employment in 2010 and 2011 analyzes the stimulus effect of several policy options, and it puts extending the tax cuts at the bottom of the list in terms of their effectiveness in stimulating economic growth and job creation. They note that, “[I]ncreasing the after-tax income of businesses typically does not create much incentive for them to hire more workers in order to produce more, because production depends principally on their ability to sell their products.”
-Scott Russell
Since Sub-S businesses close out the net to their personal income would they not get the brunt of a tax increase if over $250,000? These businesses do not have a “retained earnings” to carry forward for expansion, new hires, new machinery, etc. so they would need the $ to grow their business that would go to the tax increase from letting the cuts expire, right?
Someone is going to have to explain to me some day, why a person who simply makes more money than someone else should have to carry more and more of the tax burden. I’ve never understood the “just because they can argument.” High earners automatically pay more as a percentage of their revenue. Turning it over to folks in Washington DC to spend is such a bad idea. They WASTE so much money – Why don’t they start with eliminating this waste?
The Bush tax cut should be voted up or down prior to the November mid-terms. Politicians are rarely timid when it comes to spending hundreds of billions of Americans’ hard-earned money. Who has the courage and fortitude to exhibit their convictions during an election year? Unfortunately, many have demonstrated cowardice and wanton disregard for the wishes of the American people. It is obvious that they fear the up or down vote because that vote would be a career changer for some. Most citizens realize that it was politicians from both sides of the aisle who were responsible for decimating the American economy. Now is the time for truth telling, integrity, and courage of conviction. Our economy has complex problems. Out-of-control spending must cease. Assuredly, taxes will rise in the future. As Arends concluded: “…Deficits, after all, are merely deferred taxes.” However, mid-recession tax increases seem ludicrous.
Yes and no. they still have there personal write off to consider,they have to invest in the business during the year.
I can tell you this, the majority of these type of corps don’t pay much in tax, they write everything off, i’ve seen hundreds of these tax returns, most of there bottom lines would not allow them to even qualify to buy a car.