This week, America will have the chance to observe two very different paths in Washington. One road would lead to increased taxes on small businesses, further dragging down the economy; the other would lead to job creation by stopping a tax hike on the very entities most likely to invest and hire.
At the end of this year, a large number of tax rates and provisions will expire and reset to higher levels, including marginal income tax rates, marriage penalty rates, and the estate tax. For example, the capital gains rate will increase to 20 percent from 15 percent. And the tax rates in the top brackets will increase to 39.6 percent from 35 percent, to 36 percent from 33 percent, and to 31 percent from 28 percent. The expiration of these lower tax rates will greatly affect small business owners whose companies are organized as “pass-through” entities, where their business gains or losses are reflected on their individual tax returns.
Surprisingly, the President and Senate Democrats would like to let the lower rates expire for income above $200,000 for individuals and $250,000 for married couples. Instead of increasing taxes on well-to-do individuals, allowing these tax rates to go up actually hits struggling small businesses. This plan would raise taxes on about 940,000 small businesses, according to the nonpartisan Joint Committee on Taxation. This simply doesn’t make any sense. Why would anyone think that raising taxes on job creators in a sluggish economy is a good idea?
A recent economic study by independent accounting firm Ernst and Young showed that small business job creation would be hindered by the President’s proposal to raise taxes on nearly a million small companies, costing more than 700,000 jobs.
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It's not just future jobs at stake for next year. Many small businesses are already holding back on investing in their businesses now. In a small business poll released this week by lender TD Bank, the majority of small businesses said they’re holding back on adding more employees in the coming months because of concerns about the economy, even as some report that they are understaffed. Small businesses make future hiring decisions based on current and future tax policy, but they’re handicapped by the uncertain tax landscape. Congressional Democrats appear to be satisfied to let small business men and women sweat it out.
By contrast, Republicans want to stop the tax hike on small businesses and begin work on pro-growth tax reform. In fact, the House will vote on a bill this week that will provide a clear pathway to comprehensive tax reforms in 2013.
The President said it best in 2009. You don’t raise taxes in a recession. And based on the economic data, we’re experiencing recession-like growth right now. The Commerce Department announced last Friday that the nation's GDP grew at a sluggish annual rate of 1.5 percent in the second quarter, the slowest in a year. This 1.5 percent growth is far less than the 3.5 percent rate in 2010 when President Obama joined Republicans in preventing tax hikes for the sake of the economy.
The latest unemployment rate is 8.2 percent for June, marking the fifth straight month of slowing job growth. This persistent bad news is wearing on our job creators and sapping our entrepreneurial strength. Small businesses are pessimistic about future outlook. The latest NFIB Small Business Survey report showed that Small Business optimism is at its lowest level since October 2011.
While House Republicans are focused on jobs, the President and Congressional Democrats continue to play politics with the issue of taxes. Dividing the nation based on class envy may be effective politics, but it doesn’t address our nation’s most pressing problem – jobs.
Small businesses agree. Many of them expressed their opinion through our Committee’s interactive website, Small Biz Open Mic:
Cliff Laverty, owner of Total Radio, Inc. in Tulsa, Oklahoma said, “President Obama's proposal is going to negatively impact our ability to reinvest and grow our business. So few people outside of small business owners really understand how Chapter S Corporations are taxed and President Obama has done a masterful job of convincing the public that what we are taxed on is what we actually make. I don't know why anyone would want to be an entrepreneur in this present business climate."
Steve Piechota, owner of Netronix Integration in San Jose, California said, “Bottom line, raising our taxes means we'll quit growing, lay off people and stay under the $250K level for income. We are not the problem."
Ken Smith owner of Tracer Electronics LLC in Mt. Juliet, Tennessee said, “As a small business owner who files taxes based on bottom line company profits, I am appalled that this administration is considering additions to my already outrageous tax bill. I reinvest a good majority of my bottom line earnings to grow my business and I can't continue hiring additional employees with these heavy tax burdens. If our President passes this ludicrous tax legislation, it will cost me another 40K per year. That money could be put to better use by the company that earned it rather than the government who knows how to waste it."
Gloria Cuerbo-Caley, owner of Media Resources, Ltd. in Canton, Ohio said, “If we have to take our profits, as we have in the past, and hand them over in the form of taxation - it will force companies like mine to keep wages lower and hire less people - or lay off those working for us to compensate for the taxes. It is not in the best interest of our country."
In a stagnant economy, it makes no sense to raise taxes on anyone, especially the small businesses we need to take risks and invest in their companies. Small businesses are best suited to make the decisions that will maximize their resources to create jobs. They employ about half of all U.S. workers and account for about 70 percent of all new jobs. Everyone knows that whatever you tax more, you get less of. If the Senate Majority Leader and President had ever built a business, then they’d know this basic economic principle.
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