False Stats to Cause Misery for Small Businesses
by Ashley Muchow The economy has proved to be the most important topic in politics today. Rightfully so. Come the end of last month, U.S. unemployment stood at 9.6%. Economic activity left much to be desired as GDP rose 1.6% in the second quarter of 2010, compared to a 3.6% increase in the first. Naturally, Washington feels obliged...
by Ashley Muchow
The economy has proved to be the most important topic in politics today. Rightfully so. Come the end of last month, U.S. unemployment stood at 9.6%. Economic activity left much to be desired as GDP rose 1.6% in the second quarter of 2010, compared to a 3.6% increase in the first.
Naturally, Washington feels obliged to do more. The sunset provision on the Bush-era tax cuts is set to expire the end of this year and much debate has beset our nation’s capital with questions of what should be done. Do we pull back? Let the cuts that have provided relief to the American public for the past decade expire? Or rather, do we extend them? Thus easing the burden the economic crisis has inflicted on the majority of Americans.
Aha! Why not play it safe and appease as many constituents as possible by cutting off the wealthiest Americans. But wait one second. One would have to assume increasing the 35% rate to 39.6% would likely impact small businesses, who often take in more than $200,000 annually.
Nancy Pelosi denies such deductions, claiming only 3% of small businesses would fit into such bracket. But IRS data shows otherwise. Kevin Hassett and Alan Viard, in a recent WSJ article, cited various studies and performed their own analysis to show, quite vividly, the injurious impact tax hikes on “wealthy Americans” will likely have on small businesses and unemployment numbers.
- According to IRS data, 48% of the net income of sole proprietorships, partnerships, and S corporations went to households with incomes above $200,000 in 2007.
- A 2000 academic study showed the increasing progressivity of the tax code discouraged entrepreneurs from starting new businesses.
- A 2000 National Bureau of Economic Research study showed high responsiveness of sole-proprietor business activity to tax rates.
- A National Federation of Independent Business (NFIB) survey unveiled that small business owners placed taxes as the second most important problem they face, after weak sales.
Small businesses are not the only fountainheads of economic rejuvenation. Mid-sized and large companies fuel economic growth and employ Americans nationwide.
Hassett and Viard sum it up superbly: “Because marginal tax rate increases impede long-run growth, they should be avoided in good times and bad. But now is a particularly inopportune time to raise rates, as small businesses are still struggling from the recession…The evidence is clear, that lifting the top rate will hamper the business investment upon which our nation’s prosperity depends.”
Check out the Institute’s latest report to see how expiring Bush tax cuts will affect you and your family.