NCPA - National Center for Policy Analysis


February 3, 2010

In his State of the Union, President Obama mentioned "small business" 14 times.  He talked about his desire to subsidize lending to small businesses, to give them tax breaks, to help them export to other countries, and above all to get them to create jobs. 

Unfortunately, the administration has chosen a give and take approach to small business -- it takes a lot, and then gives back something when it feels like it.  Small businesses are being offered a high-profile basket of goodies, but they also know they face large and uncertain costs from future government actions.  This does not create a positive environment for investment or job creation, says Josh Barro, a Senior Fellow with the Manhattan Institute. 

While the size of aid to small businesses is uncertain, we know the added burden on them will be large: 

  • The President's budget proposes to return the top two income tax brackets to their Clinton-era levels, taking the top rate from 35 percent to 39.6 percent.
  • Additionally, high-income filers will see the value of tax deductions fall due to the return of deduction limits suspended by the Bush tax cuts. 

Because most small business income is passed through onto owners' personal income tax returns, this represents a significant tax increase on small business, says Barro: 

  • The Tax Foundation estimates that the return to Clinton-era treatment of high earners represents a $36.5 billion annual increase in taxes paid by small businesses.
  • This is just a floor, though; the Tax Foundation estimate does not include the effects of an additional proposal in the Obama budget to calculate tax deductions based on a 28 percent tax rate, even where the taxpayer faces a higher rate.
  • This likely pushes the annual small business tax bite over $40 billion -- a bit less than half of the total annual tax hike on high earners. 

The deficit is big, new government programs are expensive, and it's not surprising the administration is looking for new revenue.  But if it wants to restart the economic engine of small business, layering on new taxes is the wrong approach, says Barro. 

Source: Josh Barro, "Obama Giveth and Obama Taketh Away," Real Clear Markets, February 2, 2010. 

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