As Congress debates solutions to the “fiscal slope,” the future of the Bush Tax Cuts on incomes over $250,000 continues to play a pivotal role. Allowing these tax cuts to expire will provide over $1 trillion in new revenues—a key component of a balanced approach to deficit reduction—yet we consistently hear that taking this approach will disproportionately harm small business “job creation” and long-term economic growth.
As a new policy brief clearly demonstrates, these concerns have little merit—allowing these tax cuts to expire will have virtually no impact on the kind of small businesses that genuinely contribute to job creation. The specific tax changes under discussion would allow the 2001 and 2003 tax cuts on incomes above $250,000 to expire in 2013, thus changing the top marginal tax rate from 36 percent to 39.6 percent. According to the report, allowing the upper income tax cuts to expire in this way would affect only small percentage of small business owners and small business income, and even those few would see no significant barrier to capital reinvestment and job creation as a result.
First, it’s important to understand that these tax changes only apply to small businesses that file through the personal income tax code and have no impact on those that pay corporate income tax, so many of North Carolina’s largest businesses—and employers—would not be affected. Secondly, we can further narrow the universe of small business owners affected to just those that actually have employees on their payroll, a number which the Center on Budget and Policy Priorities estimates at just 7.9 percent of all filers who have ”small business” income. Lastly, we can narrow this group even further to those small business owners that have incomes in excess of $250,000 per year. a group according to the U.S. Department of the Treasury accounts for only 2.5 percent of all small-business owners.
At the same time, only a quarter of total small-business income would be affected by this tax change, because 74 percent of the nation’s small-business income is earned either by filers who bring home less than $250,000 in income or by entities that are not small businesses as traditionally understood (e.g., law firms, partnerships, and rental properties). In other words, most of the tax-cut benefits over the past decade have flowed not to actual small business employers, but rather disproportionately to wealthy individuals who are not “job creators” in any meaningful economic sense. As a result, eliminating this tax cut will take very little away from the small business employers who never received much from the tax cut in the first place.
Perhaps even more importantly, those few business owners that would be subject to the tax changes would be unlikely to face any real threat to their ability to create jobs. For example, minimal changes in the top marginal rate will have limited effect on the investment decisions of these small businesses because their effective tax—the level of taxation after taking into account various deductions and credits—is already low, due to various existing small business write-offs related to equipment, capital loss, and perhaps most critically, payroll.
Given the evidence, it is clear that allowing the tax cuts on incomes over $250,000 to expire will have virtually no impact on the kind of small businesses that genuinely contribute to job creation.