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Obama’s Big Tax Increases on Small Business

Saturday, October 13, 2012

It is quite a stretch for President Obama to argue that he wants to cut taxes for small businesses. In reality, he is proposing to increase taxes on small businesses by around $49 billion.

President Obama has touted his treatment of small businesses repeatedly over the course of the campaign, and last week’s presidential debate was no exception. “I also lowered taxes for small businesses 18 times. And what I want to do is continue the tax rate — the tax cuts that we put into place for small businesses and families,” argued Obama.

While in the strictest sense it is true that the president has lowered taxes for small businesses 18 times, this does not accurately reflect the totality of his small-business tax policy. In fact, on net, the president’s policy proposals will inflict significant harm on small businesses.

First, to the 18 times. Note how the president corrected himself after he accidentally mentioned tax rates. There is a clear reason for this: his “tax cuts” for small businesses have not been across-the-board marginal rate cuts, but instead have been targeted and often temporary deductions, tax credits, and subsidies. (It’s easier to cut taxes 18 times if your cuts are temporary.)

Of the 18, only 10 of them are still in place. Half of these 10 are extensions of programs first enacted by President George W. Bush or even before his time in office. (I assume that these are not “the failed policies of the past” to which the president does not want to return.)

So we started with 18, but now we’re down to 5. Estimates from the Congressional Budget Office, the Joint Committee on Taxation, and the U.S. Treasury Department suggest that the sum total of the tax breaks created by the remaining five will amount to at most $3 billion in 2013.

When the president says that he wants to continue the tax cuts that he has put in place for small businesses, presumably this $3 billion is what he is referring to.

But it is important to remember that taxes can go up and down. Let’s take the president at his word and assume that the $3 billion-per-year cuts stay in place. Is this the totality of the president’s tax policy proposals for small businesses?

Every time Obama touts his small-business tax policies, what he is really announcing is that if reelected, he will destroy 200,000 American jobs in 2013 alone.

Nope. In addition to keeping the $3 billion in cuts, the president has proposed and even enacted several tax increases for 2013 that would apply to small businesses that are organized as pass-through entities, firms that have their income taxed at the individual, not the corporate level — for example, partnerships and S corporations. (The overwhelming majority of small businesses are organized as pass-through entities.)

Specifically, the president has proposed the expiration of the Bush tax cuts, which will increase taxes by 4.6 percentage points on incomes above $250,000. Obama will increase taxes by a further 3.8 percentage points on these same incomes through the Unearned Income Medicare Contribution. (Is it unearned because “you didn’t build that”?) And we shouldn’t forget the reimplementation of the Pease provision, also scheduled for January 1, which adds an additional 1 percentage point to the effective tax rate for these businesses.

It should come as no surprise that these tax increases dwarf the $3 billion in tax decreases that the president has brought small businesses.

According to a report by the Joint Committee on Taxation, approximately $690 billion of business income will be reported on tax returns subject to the marginal rate increases. A very conservative estimate based on IRS figures of the distribution of partnership and S-Corp income shows that only about 80 percent of this income is actually subject to the highest marginal rate, which puts the size of the tax hike at around 9.4 percent of 80 percent of $690 billion, or about $52 billion.

That $52 billion is much more than the sum of all tax breaks, which was about $3 billion. So it’s quite a stretch for the president to argue that he wants to cut taxes for small businesses. In fact, he wants to raise taxes on small businesses by an order of magnitude.

What does this mean for the affected firms? On average, an additional tax bill of $48,000. That’s a stunning increase.

A major issue in this presidential campaign is jobs. How would employment be affected by this tax increase?

To be fair to the president, let’s adopt the White House’s own multiplier. The White House claims that the American Jobs Act would create 1.9 million jobs thanks to $447 billion in additional spending and tax breaks. This amounts to one job for every $235,000.

As we have seen, the president’s policies would raise taxes on small businesses by $49 billion. According to his own math, that would lead to some 200,000 fewer jobs.

By this arithmetic – President Clinton should be pleased by this method — every time Obama touts his small-business tax policies, what he is really announcing is that if reelected he will destroy 200,000 American jobs in 2013 alone. That’s 800,000 jobs over the course of a potential second term, or one additional unemployed worker for every 14 unemployed workers today.

“Normally,” said Obama back in August 2009, “you don’t raise taxes in a recession, which is why we haven’t and why we’ve instead cut taxes.” As the president knows, we have recession-level unemployment. Given what he said a few years ago, why does the president want to raise taxes on small businesses?

This would be an excellent question for the next presidential debate.

Stan Veuger is a research fellow at the American Enterprise Institute.

FURTHER READING: Veuger also writes “Barack Obama Is No Bill Clinton” with Michael R. Strain and explains “The Saints Ain't Sinners” with Kevin A. Hassett. Alex Brill contributes “The Romney Tax Plan: Not a Tax Hike on the Middle Class.” Michael Barone says “Obama Could Be the Odd Man Out on Tax Reform.” Alan Viard discusses “To Clinton, and Beyond!

Image by Dianna Ingram / Bergman Group

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