NCPA - National Center for Policy Analysis


October 24, 2008

Barack Obama declared that his economic plan is all about jobs.  But how do you create more jobs when you want to levy higher tax rates on the small business owners who are the nation's primary employers, asks the Wall Street Journal?

An increase in "the demand for investment and labor" translates into an increase in jobs.  So if lowering these tax rates creates jobs, then it stands to reason that raising these taxes will mean fewer jobs, says the Journal:

  • From 2002 to 2007, with lower tax rates in place, the U.S. economy added 8 million jobs, or about 125,000 per month.
  • Small business wrote the paychecks for up to 80 percent of new jobs in 2005.

Yet, with Obama's plan, the small- and medium-sized businesses that create most of the new jobs will be hit the hardest:

  • According to the Senate Finance Committee, of the filers in the highest two tax brackets, three out of four are small business owners.
  • A typical firm with a net income of $500,000 would see its tax burden rise from $146,000 to $166,000 a year under Obama's plan.

Moreover, Obama's tax increase would hit the bottom line of small businesses in three ways, says the Journal:

  • Because 85 percent of small business owners are taxed at the personal income tax rate, any moderately successful business with an income above as little as $165,000 a year could face a higher tax liability.
  • The Obama plan phases out tax deductions, raising tax rates imposed on this group by 1.5 percentage points.
  • Small business owners will be required to pay a 4 percentage point payroll tax surcharge on net income above $250,000.

All of this would bring the federal marginal small business tax rate up to 45 percent, while big business would continue to pay the 35 percent corporate tax rate, says the Journal.

Source: Editorial, "Socking It to Small Business," Wall Street Journal, October 21, 2008.

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