NC Budget and Tax Center

The Truth about taxes and small businesses

When Congress finally returns from its August recess 10 days from now, it will face the critical issue of addressing the looming expiration of the tax policies enacted under President Bush and President Obama.

In this debate, we’ve heard a lot about the effect of tax changes on small businesses, job creation, and long-term economic growth.  Fortunately, the overwhelming weight of evidence makes it clear that ending tax breaks on income over $250,000 will not harm small businesses or North Carolina’s economy.  Middle-class consumption drives job creation far more than relatively minimal changes in marginal tax rates, and most importantly, there just aren’t that many small businesses in North Carolina that would even be affected by these tax changes.

Everyone will continue to receive some tax cut under either the Senate or House plan; even those families with incomes over $250,000 will still keep their tax cuts on the portion of their income below that quarter-million-dollar threshold.  These middle-income tax cuts promote consumer spending, allowing more middle-class families to support small businesses as paying customers, in turn providing these companies with additional revenues to increase profits and hire more workers. Higher-income families, on the other hand, tend to save, rather spend additional income resulting from tax breaks, in turn weakening the ability of these tax cuts to promote investment and job creation.

Most obviously, there just aren’t that many small businesses that would be affected by eliminating the tax breaks for incomes over $250,000, for the simple reason that very few small businesses are taxed under the personal income tax, and those that very often don’t actually hire large numbers of workers.

More than 98 percent of families and 97.5 percent of small businesses would continue to see lower rates. Only 1.4 percent of families and 2.5 percent of small businesses would be affected by restoring tax rates on income over $250,000 to the levels in place during the Clinton Administration in the 1990s.

And in contrast to the sluggish job creation of the 2000s, these businesses did pretty well during 1990s, despite the higher tax rates of the Clinton years.  Under the 1990s tax rates, small businesses increased hiring by an average of 2.5 percent every year, while under the lower Bush-era tax rates these businesses increased hiring by an average of 1 percent each year.

End the Bush tax breaks on incomes over $250,000 will have a net positive impact on North Carolina’s small businesses and prospects for sustainable economic growth.

 

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