During yesterday’s tax reform debate on the House floor, we heard a lot about the need to cut personal income taxes so that small businesses can create jobs and the economy can grow. This is a growing refrain among advocates for tax cuts for the wealthy, so common in fact, that policymakers made it once before—in 2011, when they passed an exemption of business pass through income , an exemption that they are now repealing (apparently the tax cut didn’t work).
As with many of the claims made during the debate about taxes this session, the idea that personal income tax cuts spur job creation is just not borne out by the facts.
Personal income tax cuts for the wealthiest taxpayers do not target actual small business job creators. Only 2.7 percent of personal income taxpayers are owners of small businesses that have employees , according to the U.S. Treasury Department. Moreover, profits from small businesses with paid employees account for less than 4 percent of the total income earned by households with incomes over $100,000 nationally. There is no evidence that businesses owned by high income taxpayers have more employees than those owned by lower income taxpayers, and as a result, no reason to provide tax cuts that disproportionately benefit those with the highest incomes. And for many small business owners of any income level, there is often limited interest in growing the size of their business—consider a family restaurant, for example—so again, cutting these business’s won’t lead to job creation.
Even those with small businesses that would receive a tax cut under the reductions in the personal income tax aren’t likely to create jobs with those dollars. This is because the effective tax rate on small-business income—the level of taxation after taking into account various deductions and credits—is already close to zero for many small business filers . Perhaps most importantly for job creation, small business owners can already deduct 100 percent of their payroll costs  from their taxable income, meaning that the tax burden for adding and paying new employees is already zero. As a result, cutting the personal income tax rate does nothing to reduce the costs of hiring new employees.
Businesses care far more about access to infrastructure, a skilled workforce, great schools, and quality of life than they do about taxes, since taxes account for just 2 percent of business costs. In particular, start-ups—those new firms responsible for the bulk of job creation—are even less likely to benefit from personal income tax cuts because they invest significantly in equipment, products, and payroll, and as a result, generate relatively little profits in their early years—and thus very little tax liability. What most of these growth-oriented start-ups really need are customers, the opening of new markets, and access to significant capital pools in order to expand. None of these are created through tax cuts.
Personal income tax cuts are not a good strategy to support small businesses nor will they lead to the job creation that North Carolina needs. Instead, they will reduce revenues along with the state’s ability to invest in what these businesses actually need—technical assistance and access to capital for start-ups, research and development at the university system, and training for workers and business owners. Its time policymakers took a deeper look at the actual needs of businesses instead of justifying tax cuts for the rich in their name.