Will Tax Cuts For Top Tier Create Jobs?
My company is a small business. I think. We have approximately 25 employees. Even in our hometown Salisbury, North Carolina most people have never heard of us.
I’m not sure what the word “small” means, but compared to most companies in the US, we may be considered big. The IRS reports that approximately 6 million corporations, 3 million partnerships, and over 20 million proprietorships file tax returns. Corporations make the most money, have the best stats, and hire the most people.
Of the 6 million corporations, only 160,000, or 7%, have more assets than we have, and only 35,000, or 1.5%, have more sales than we do. Are we a small business? I certainly think so. Our employees think so. I wake up every day wondering if CVS or Walgreens or Walmart or all those other huge pharmacies are going to squash us.
So, I feel pretty much in the middle of this tax debate that is using small businesses as the bait for two hot tax issues. First, should taxes go up by 3% for people making over $250,000? Second, should employers have a payroll tax holiday if they hire new employees? Clearly, those tax breaks would increase my profits a little, but would they encourage me to invest and hire more employees? Absolutely not. Will it affect the 2012 election? Probably.
“Small businesses are the engine of job growth,” we’re told. Talking heads say that there are 700,000 small businesses earning over $250,000. On average, every county in the country has 200 small businesses earning that amount. In Virginia, Maryland, and DC, that’s reasonable, but drive 75 miles in any direction to an “average” county. Butch Cassidy was equally perplexed: “Who are those guys?” Most of those 700,000 small businesses earning over $250,000 are doctors and lawyers. Are they the engines for job growth?
Perhaps a brief tax history might help. In the early 1970s, Congress passed a 10% income tax surcharge to pay for the Vietnam War. Back then, both political parties were fiscally responsible, cooperative, and voted for that tax. It was pretty simple: compute your tax and add 10%. (Did you know that North Carolina has an add-on tax now?) If your tax bill was $1,000 and you had paid in $1,300, you would have gotten a $300 refund. But with 10% added to your tax bill, making it $1,100, your refund was only $200.
Over the next 20 years, taxes were cut on the idea that deficits would go down because economic growth would more than offset the revenue loss. Indeed, there was economic growth but deficits went up. President Reagan criticized President Carter’s $50 billion deficits, but his budgets (the President, not Congress, makes out the budget) were above $300 billion.
In 1988, the first President Bush, said, “Read my lips. No new taxes,” but knowing he had to be fiscally responsible, he raised taxes. In 1993, President Clinton raised tax rates at the top of the income scale about 3%. Over the next eight years, the economy grew like never before, tax receipts increased, and deficits disappeared. Microsoft, Apple, Coke, and many new and old companies grew like weeds despite higher taxes. The stock market tripled.
In 2001, the second President Bush passed a 10 year tax cut that is scheduled to expire at the end of this month. Today, compared to 10 years ago, the stock market is the same and unemployment is double.
Consequently, the United States now faces a huge and growing deficit problem. We spend $3 for every $2 we collect in taxes. There is waste, for sure, but not that much. Those dreaded “earmarks” are less than 1/10 of 1% of the entire budget. Contrary to popular belief, Congress cannot eliminate earmarks to balance the budget. In fact, just walking out of our wars and then eliminating the entire defense department completely wouldn’t balance the budget. Nor would eliminating Social Security completely. This is a really big problem.
Like students waiting until the last moment to prepare for exams, Congress has waited until the last moment to deal with the expiring tax cuts. (Frankly, this tax debate should be part of a larger debate about the entire budget.) President Obama is arguing that the Bush tax cuts should be kept for those making under $250,000. That will increase borrowing and the deficit by $2.7 trillion. The Republicans and some Democrats want to extend the tax cuts permanently which will increase borrowing and the deficit $3.7 trillion. So, this argument is about whether to borrow another $2.7 trillion or $3.7 trillion. Eliminating those pesky earmarks saves about $30 billion, or .001% of those amounts.
Why borrow these extra trillions? To help small businesses -- like ours -- hire people and grow. If my company earns an extra $10,000, these tax cuts save us $300. If Congress also passes a payroll tax holiday and we hire another employee for, say, $25,000, it will save us another $1,200. I’m not fond of taxes, but if the government cuts my company’s taxes $1,500, is that why my company is going to hire another employee? Not at all. We hire new employees when she or he is going to help our business, not to save $1,500 in tax.
Growing a business is about growing a business, not taxes. (Of course, we could move to the Bahamas or Ireland and reduce our taxes, but small businesses can’t do that.) No business decides to grow or not grow because of taxes. No business decides to hire a new employee or not because of taxes. Why doesn’t Congress understand that?
US Senator Everett Dirksen once said, “A billion here, a billion there, pretty soon it adds up to real money.” No more. Now, we talk trillions.
This debate is silly. Ignore the rhetoric. It’s about how much more are we going to borrow and increase the deficit. It is not about reducing the deficit by a dime.
David Post is the owner of a small business that was founded in Washington, DC and is on Inc. Magazines list of the fastest growing companies in the US. He was a professor at American University and Georgetown for 10 years. Contact him at: editorial@Georgetowner.com