taxes

4.6%Tax Hike Won’t Cost Small Business Jobs

Hasn't anyone done the math? Dec 12 2012

You've probably had quite enough of the tortuous proceedings between the White House and Congress over the "fiscal cliff" and don't need to hear from us, too. For that matter, we signaled back in April that January's perfect storm was on the horizon.

But there is one part of the debate that rankles and needs debunking: the claim by Republicans that the 4.6% tax increase (to 39.6%) for top earners that the President insists is his due for winning the election would cause job losses for small businesses.

As exemplar, there was Rep. Tom McClintock (R.Ca) just recently talking to Erin Burnett on CNN, telling us that those affected will mostly be "small businesses filing a Subchapter S" tax return and if we raise the taxes on them,

“according to the Congressional Budget Office, that's going to mean that about 200,000 American families will be out of work next year and that's the low estimate. Ernst & Young estimates 700,000 more unemployed as a result of these tax increases on job creators”.

He earnestly believes what he is saying, we are persuaded, but, like the other members of the chorus who sound this alarm, he has evidently never pushed a pencil to see if he is right and an outbreak of hysteria has even panicked the CBO and Ernst & Young.

Now, you may disagree with raising taxes, but it shouldn't be for this bogus reason because it doesn't make mathematical sense. Everybody calm down while we demonstrate.

First, Obama claims that “97% of small businesses fall under the $250,000 threshold” and would therefore be exempt from the tax hikes. His 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. Some 54% of owners file their taxes 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 Form 1040. Only that group of owners would be subject to the 4.6% added tax increase — it is a tax on one's personal income, not on the business itself — and only to the extent that an owner's passed through income exceeds Obama’s targeted $250,000 cutoff.

So it is difficult to determine why the few affected would result in so much job loss. And even within the over-$250,000 group that merges business profits into their personal taxes, there's not enough difference to have an effect. Let's have a look at the arithmetic.

^tax time The increase from 35% to 39.6% comes to $46 on each additional $1,000 of income. On the way there, the next lower bracket increases from 33% to 36%, which comes to $30 per $1,000. A minimum wage employee earns (an unlivable) $15,000 a year; we'll ignore any attendant outlays so as to keep the cost of hiring as low as possible for our example.

How many thousands must that small business owner be taking home for those $30 and $46 nicks to add up to one such employee’s paycheck? The answer: $621,000 (for the math, see sidebar).

So a small business owner would have to be taking home $621,000 for the added tax burden to displace what would otherwise have paid for a minimum wage employee for a year. And, by extension, that owner would have to be taking home almost $1,000,000 to claim that the added taxes would cost two such jobs. And so on...ever higher income levels in huge increments for the taxes to equate to each additional job that our job creator says will not happen.

what's with the big take home pay?

Why would an owner, complaining about this tax preventing job creation, take so much income 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 that much more money back into the business. So much for calling the tax increase a “job killer”. One could even say that Obama's proposed tax is an incentive to leave the money in the business where it might be a “job creator”.

Yet Republican leaders — McConnell, Boehner, Cantor, etc. — have schooled the Republican legions to insert “job killer” into every sentence. 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. That is just meant to steer the public away from the real strategy of protecting wealthy campaign donors from paying an extra $46,000 on each added $1,000,000 of earnings.

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