Small Business Would be Hit the Hardest if Democrats Allow Tax Cuts to Expire

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The Obama administration is planning on letting the Bush tax cuts expire for upper income tax payers. Sounds great in theory. Let a few rich people pay a little bit more in taxes so we can all benefit. After all, surely they can afford it…right?

Wrong. First, let’s rid ourselves of the notion that the Bush-era tax cuts only impacted the wealthy. They impact all of us. As the Investor’s Business Journal writes this “ tax hike against the "rich" is in fact a tax hike on small businesses.” The reason, as Americans for Tax Reform, explains :

Unlike corporations, small businesses usually don’t pay their own taxes.  Rather, business profits flow through to the business owner.  The business owner pays taxes on her small business by adding the profits to her income tax form.  Therefore, personal income taxes are the same thing as small business taxes.”

Nevertheless, Treasury Secretary Tim Geithner took to the airwaves on Sunday attempting to sell the tax hikes to Americans. Geithner argued that,

“We’re in a transition … from the extraordinary actions the government had to take to break the back of this financial crisis to a recovery led by private demand. That transition is well under way. It’s going to continue and it’s going to strengthen."

Far be it from doing anything to save us from the financial crisis, the government is content with breaking the back of the private sector. The economic recovery remain fragile, profits are inching back to normal, but hiring remains slow. Before committing to growth small businesses are looking for relative calm – something the government is unwilling to provide them with.

Allowing the tax cuts to expire would be the worst possible thing the government could do for our recovering economy. Republicans are not the only ones banging the drum against raising small business taxes. The Democratic chair of the Senate Budget Committee has said that “the general rule of thumb would be you’d not want to do tax changes, tax increases…until the recovery is on more solid ground.”

Gerry Connolly (D-VA) went a step further, suggesting that tax hikes, even out of a recession could depress GDP. He has said ,

“I think given the fragility of the recovery, the timing is wrong for any kind of tax increase of this nature. I know that puts me out of step with many in my own caucus, but it’s important for members to remember the top 5% [of earners] generates 30% of consumer spending.”

In other words, that Keynesian “multiplier” effect which Democrats love to talk about is working over time when it comes to extending these tax cuts. Of course Obama should know this. His chief economic adviser, Christina Romer, published a paper finding that tax cuts have large multipliers, which “have very large and persistent positive output effects.” How big?

“Our estimates suggest that a tax increase of 1 percent of GDP reduces output over the next three years by nearly 3 percent. The effect is highly significant.” In addition, we find that the output effects of tax changes are much more closely tied to the actual changes in taxes than to news about future changes, and that investment falls sharply in response to exogenous tax increases.

But has he listened? No. I guess we shouldn’t expect any better. The health care debate should have been definitive proof that President Obama is not really the listening type.

His inability or unwillingness to listen will have enormous fiscal impact on small businesses. The expiration of the Bush tax cuts on high earners translates into a $500 billion tax hike over the next ten years. A significant portion of that will be borne by small businesses who will be unable to use the money to hire, expand, or invest in infrastructure. With many economists already warning of a potential double-dip recession, this could be the straw that broke the economy’s back.

Democrats must come to understand that they cannot just rely on hiking taxes to pay for their exorbitant and ill advised spending. Americans are facing a similar situation as the United States. Unable to earn as much in a depressed market, we aren’t borrowing more, and spending more, we are prioritizing and cutting back. We should expect the government to do the same. But until Washington understands that we have a spending problem, not a revenue problem, Americans will continue to see ever higher taxes. Come November it’s time to tell Washington we can’t afford the same spend-then-tax policies that have defined the past two years. If Congress is going to let tax cuts expire, voters should be happy to let Democratic majorities do the same.

by Brandon Greife, Political Director of the College Republican National Committee