Sep 19, 2010 2:47 PM GMT
Hopefully, after this article we can dispense with the constant harping on the idea that letting the tax cuts for the wealth expire will hurt job growth.
New York TimesTax Increase Would Hit Few Small Businesses
By DAVID KOCIENIEWSKI
As Congress and President Obama wrestle over whether to let the Bush tax cuts expire for the wealthiest Americans, one of the most heated aspects of the debate, in Washington and in neighborhoods across the country, is how a tax increase would affect small businesses.
Mr. Obama wants to extend the cuts for most taxpayers. But he proposes eliminating them for the top 2 percent of wage earners, whose taxes would rise. Opponents of the plan warn that a tax increase would batter hundreds of thousands of small businesses — from Silicon Valley start-ups to mom-and-pop convenience stores — and prevent them from creating the jobs that might lift the sagging economy.
“It’s a body blow to the small-business community,” said Grover Norquist, president of the conservative advocacy group Americans for Tax Reform.
Despite that emotional appeal, Internal Revenue Service statistics indicate that only 3 percent of small businesses would be subject to the higher tax, and many studies of previous tax increases suggest that it would have minimal impact on hiring.
According to the Joint Committee on Taxation, 97 percent of all businesses owners do not earn enough to be subject to the higher rates, which would be levied on income of over $200,000 for individuals and $250,000 for families.
Even among the 750,000 businesses that would be subjected to the higher rates in 2011, many are sole proprietors — a classification so amorphous it can include everyone from corporate executives who earn income on rental property to entertainers, hedge fund managers and investment bankers. Because 80 percent of America’s 32 million businesses are sole proprietorships, 90 percent of the tax cut would be derived from businesses without employees.
Trade groups lobbying to extend the tax break for wealthy Americans argue that when hobbyists and home-based enterprises are removed from the equation, the total number of businesses affected is closer to 8 percent. Those companies are responsible for nearly half of all business revenue generated in the country, and according to the conservative American Enterprise Institute, would be less likely to invest or hire if subjected to higher rates.
But much of the research over the last two decades has found that increases in top tax rates can lead to an increase in the formation of small businesses, as wealthy individuals apparently begin start-ups to avail themselves of the more generous tax breaks offered to businesses.
“Higher taxes may lead individuals to seek self-employment because the opportunities for tax evasion and avoidance are greater,” according to a report released this month by the nonpartisan Congressional Research Service, which surveyed more than 20 studies on the effects of taxes on hiring.
The intensity of the debate is a testament to the place that small businesses hold in the culture as a symbol of American ingenuity. That reverence has grown stronger in recent decades, as the decline of large manufacturers has made the economy rely on start-ups and small businesses to create jobs and entire growth industries.
But the way the I.R.S. classifies small businesses is vastly different from the public perception of the neighborhood dry cleaner or the small tool-and-die shop. A report released by the Joint Tax Committee in July found that many of the tax returns categorized as small businesses were actually filed by wealthy taxpayers who earned business income through limited partnerships or S corporations to allow their firms to avoid paying corporate taxes.
The study found that in 2005, 19,000 of those small businesses had revenue of more than $50 million...
Ben Thompson, a business owner in Zanesville, Ohio, said his company would be forced to make modest cuts in capital spending if the tax breaks expired, but would not change its hiring decisions.
Mr. Thompson and his brother Tim own Primary Aim L.L.C., which operates 29 Wendy’s fast-food restaurants in Ohio and West Virginia and employs 1,000 people. Although the company averages $42 million in revenue a year, Mr. Thompson said, he draws a salary of less than $250,000 and files as a limited liability company because the rates are lower than the corporate business tax. The company also pays him in dividends, which are taxed at a lower rate, but he declined to specify how much.
“We’re in the restaurant business, so you have to have enough people to serve your customers,” Mr. Thompson said. “We wouldn’t have as much for capital, upgrades like paving the parking lots, new technology like cash registers, remodeling.”