Reality Check: Small Business, Taxes, and the President’s Record

October 16th, 2012 at 11:50 pm

A recent blog post on the Obama administration’s tax treatment of small businesses uses a well-worn tactic out of today’s particularly misleading political toolbox: try to turn an opponent’s advantage against him.  Yet a simple look at the President’s record shows his policy agenda has been and, given the chance, will continue to be supportive of small businesses.

From his first days in office, he cut taxes for small employers – and especially those who were making new investments and hiring new workers – and went back to that well numerous times.  Going forward, the President has proposed no tax increases on business income.  He has proposed to allow the high end Bush tax cuts to sunset but this would affect only those top 3% of wealthy business concerns that pass through their business income to their personal income – a group that includes partners in investment firms, law firms and even those with book or speech income.

That’s not the hardware store on the corner; it’s the hedge fund in the corner office.

The AEI piece objects to the administration’s claim that they’ve cut taxes 18 times for small business.  And sure, some of what they’re counting as tax cuts were expansions of old ones.  I’m happy to give that to AEI, though I was in the administration and every one of these extensions was a fight.

But the point is not just how many times small business taxes were cut.  It’s how effective the cuts were in helping them through the great recession.  Here, the record is strong. Consider some of the tax cuts that President Obama has put into place:

–100% expensing:  this made it possible for businesses to write off 100% of new investments in plants and equipment last year, and President Obama has proposed to extend that another year as part of his jobs plan.

– Tax cuts for businesses that hire new workers: the President signed into law in 2010 a temporary tax cut for hiring unemployed workers and has put forward a tax cut for firms that add payroll now.  These tax cuts for hiring new workers are typically found to have among the best bang-for-the-buck of any tax cut.

– Eliminating capital gains taxes on investments in small businesses: the President temporarily eliminated capital gains taxes on investments in key small businesses – and has proposed to make this provision permanent, to help entrepreneurs access capital.

– Small business health care tax credit: the Affordable Care Act created a new, permanent tax credit to make it easier for small businesses to cover their workers – the President has proposed to expand this tax cut further.

So what we’ve basically got here is the AEI analysis ignoring stuff the President has already done and more measures he has proposed, targeted directly at smaller firms looking to hire and invest now. And by misleadingly attributing business income that goes to high-income individuals as associated with “small businesses,” their analysis significantly overstates the impact of rolling back the high-income Bush tax cuts.

There’s another point here about how business tax changes actually play out in the real world as opposed to at DC think tanks: the government allows small businesses to exempt and deduct the costs of doing business from their tax bill.  The 100% expensing rule noted above implies that the effective tax rate on new equipment is zero.  Second, small businesses that borrow to finance investment can deduct their interest costs from their tax bill.  Third, small businesses (and large ones too) can fully deduct the compensation they pay their workers, so even the higher tax rates on the wealthiest few percent of businesses simply means they will deduct a slightly larger chunk of their wage bill.

For these reasons, tax expert Bill Gale concludes, after reviewing proposed tax changes by the President, that “the effective tax rate of small business income is likely to zero or negative, regardless of small changes in the marginal tax rates.”

Look, I’ve been around this town long enough to know the following: you don’t learn squat about the highs and lows of small businesses from listening to their DC lobbyists.  At this point, the NFIB—a name plaintiff in the failed Supreme Court case to repeal the affordable care act—is nothing more than an enforcer for the Koch brothers.

That’s too bad, because small business do face unique challenges.  Excepting the hedge funds and private equity pass-throughs, they don’t have the cash or credit cushions that big businesses enjoy, nor can they tap the same economies of scale.  It’s harder for them to make it through long periods of weak domestic demand in part because they don’t have the same access to export markets as larger businesses.

Thankfully, the President has and will continue to block out the noise and help them overcome these barriers.  Meanwhile, don’t be fooled by “swift boaters” trying to turn a solid record into a handicap.

 

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3 comments in reply to "Reality Check: Small Business, Taxes, and the President’s Record"

  1. save_the_rustbelt says:

    – Eliminating capital gains taxes on investments in small businesses: the President temporarily eliminated capital gains taxes on investments in key small businesses – and has proposed to make this provision permanent, to help entrepreneurs access capital.

    Have you ever read the rules for QSB and Sec. 1244 (a long time rule)?


  2. Leota says:

    Thank you for saying it. “Third, small businesses (and large ones too) can fully deduct the compensation they pay their workers, so even the higher tax rates on the wealthiest few percent of businesses simply means they will deduct a slightly larger chunk of their wage bill.”

    I have always thought that the assertion that higher taxes would reduce jobs was entirely backward. As compensation to employees is fully deductible, payments to employees lowers total taxes paid by the employer.


  3. LEL says:

    So, the Romney’s charge is baseless that Obama is a small-business-job-killer.

    What about the flip side, Romney’s assertion that tax cuts lead perforce to small business job creation. Take this quote from the debate.

    ROMNEY: …And for me, this is about jobs. I want to get America’s economy going again. Fifty-four percent of America’s workers work in businesses that are taxed as individuals. So when you bring those rates down, those small businesses are able to keep more money and hire more people.

    Please tell me, just how is this supposed to work, except maybe in an alternative reality where business profit maximization and personal utility maximization have been repealed?


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