Doing the Math of the Tax Debate

The President doggedly campaigns for raising the rates of the top tax brackets. He would keep all the "Bush" tax cuts for the “middle class”, but raise two top rates: from 33% to 36% for income above $250,000 for marrieds ($200,000 for singles) and from 35% to 39.6% for the top bracket, which for 2011 was $379,150 for couples. This would be their "fair share", but that is not our argument.

Mitt Romney, who wants to make all the Bush tax cuts permanent, responded with “54% of American workers work in businesses taxed as individuals. So when the president wants to raise taxes on individuals...he kills jobs.” Others joined the chorus in what is a favorite Republican meme. “I used to run a small business” said House speaker John Boehner. “I would have been affected by this tax increase that the president’s calling for. This is not going to help our economy.”

“They’re completely ignoring the facts” was the President’s ready response. “We know what those who are opposed to letting the high-end tax cuts expire will say. They’ll say that we can’t tax ‘job creators’ ”. Obama claims that “97% of small businesses fall under the $250,000 threshold” and would therefore be exempt from the tax hikes.

The President’s claim is supported by Congress’s Joint Committee on Taxation, which estimates that only 3.5% of small business owners would be affected by the tax hike. Romney is also correct that some 54% of owners merge themselves and their business come tax time. They file as sole proprietors or have Subchapter S corporations, where the net profit (or loss) of the business flows through to their personal tax return — their 1040. Only that group of owners is potentially subject to the 4.6% added tax — it is a tax on personal income, not on businesses themselves — and only to the extent that their income exceeds Obama’s desired $250,000 cutoff.

The Republican argument is that these are the “job creators”, that owners of small businesses are the engine of growth. But we’re here to obliterate the claim that the 4.6% increment would be a “job killer”. Consider this:

The increase from 35% to 39.6% comes to $46 on every additional $1,000 of income. (For the bracket that would go from 30% to 33%, still less — $30). A minimum wage employee earns (an unlivable) $15,000 a year, and we'll ignore any attendant costs so as to keep the number as low as possible for our example.

How many thousands must that small business owner be taking home for those $30 and then $46 nicks to add up to one such employee’s paycheck? The answer: $371,000 (for the math, see sidebar) — and that pertains only to earnings above the $250,000 bracket subject to the tax increments.

So a small business owner would have to be taking home $621,000 ($250,000 + the extra-taxed $371,000) to claim that in order to pay the added tax burden he or she would have to fire one minimum wage employee. And, by extension, that owner would have to be taking home almost $1,000,000 to claim it cost two such jobs. And so on, for every additional job to be killed.

Another point: We ask why is the owner allowing so much income to flow into his or her form 1040 where it is subject to personal income taxes? The 4.6% tax applies only to money taken out of the business, so the claim that it is a “job killer” is backward. If the money is instead spent in the business, it isn’t taxable. The 3% of small businesses that Obama cites as yielding more than $250,000 to their owners per year — possibly much more — could avoid his tax if they plowed the money back into the business. One could even say that the proposed tax added to personal income is an incentive to leave the money in the business where it might even be a “job creator”.

So much for calling the tax increase a “job killer”. Yet Republican leaders — McConnell, Boehner, Cantor, etc. — are schooled to insert the “job killer” phrase into every sentence — a standard propaganda technique, of course. The bet is that if people hear it enough, they will think it true. In fairness, the same technique is employed by Democrats and by Obama, with their unceasing appeal that the wealthy pay their “fair share”. Who is to say that 35% is not a fair share or what, precisely, would be a fair share?

But the math above certainly shows how bogus the small business claim is. With this argument invalidated, Republicans or Democrats alike should all recognize this to be a craven tactic to deflect us from the real strategy of protecting wealthy campaign donors from paying an extra $46,000 on each added $1,000,000 of earnings.