This piece ran at POLITICO this morning…
President Barack Obama again talked about small businesses last week. “Government can’t create jobs to replace the millions that we lost in the recession,” the president said at the White House, “but it can create the conditions for small businesses to hire more people, through steps like tax breaks.”
He’s right. But it is hard to reconcile the president’s statement with the record of his administration, which has clearly not helped “create the conditions for small businesses to hire more people.” It’s even harder when considering Obama’s insistence on higher tax rates for small businesses beginning Jan. 1.
At the risk of stating the obvious: No one is getting a tax cut — regardless of whether tax relief passed in 2001 and 2003 continues or expires. If they expire, tax rates are due to rise on Jan. 1. If they continue, rates remain the same. So the question isn’t whether to lower tax rates for this or that income bracket. It’s whether to raise taxes and on whom.
The president favors keeping tax rates the same for individuals who earn up to $200,000 and couples who make up to $250,000 and raising taxes for everyone else. He argues that Republicans, who oppose raising anyone’s taxes, are “holding middle-class tax cuts hostage” to benefit “the rich.”
As it is, raising taxes on “the rich” inescapably means raising taxes on small businesses — which is to say on job creators.
In a membership survey, the National Federation of Independent Business, the leading small-business advocacy organization, found that “75 percent of small businesses are organized as pass-through entities (sole proprietors, partnerships, S corporations, etc.) — meaning they pay taxes on their business income based on the individual tax rates.”
Small businesses are the U.S. economy’s leading driver of job creation, responsible for two-thirds of all new jobs in the past decade. Taxes, like the cost of raw materials or equipment, compete with the cost of labor within a firm’s budget. When taxes rise, fewer dollars are available to invest in other priorities, like hiring more workers.
With demand down for goods and services in this recession, a higher tax burden would only further reduce the capital these small businesses need to expand and hire more workers.
This is why 31 House Democrats recently announced their opposition to the president’s plan to raise taxes in a public letter sent to House Speaker Nancy Pelosi (D-Calif.).
“We have heard from a diverse spectrum of economists, small-business owners and families who have voiced concerns that raising any taxes right now could negatively impact economic growth,” they wrote to the speaker. “Given the continued fragility of our economy and slow pace of recovery, we share their concerns. … We urge quick passage of legislation to extend the tax cuts so that American families and businesses have the certainty required to plan and make informed decisions. The sooner we act, the sooner our nation’s economy will benefit.”
A big part of their argument is to give businesses “the certainty required to plan and make informed decisions.”
Businesses are forward looking. They budget; they plan. They incorporate projected tax burdens into their budgets and plans. The threat of higher taxes tomorrow is enough to stifle hiring and investment today.
Last Wednesday, 39 House Democrats joined with every Republican in voting to stay in session, end the uncertainty and block this impending tax increase.
The president should follow their lead and do as he says: “Create the conditions for small businesses to hire more people.”
Rep. Bill Cassidy of Louisiana serves as an assistant whip for the House Republican Conference and as a member of the Republican Study Committee.