NCPA - National Center for Policy Analysis

The Tax Man Cometh

October 19, 2010

The tax policy debate is focused largely on whether or not to raise taxes on the rich in order to chip away at the deficit.  But there is a lot of confusion as to how exactly increased taxes on the top 2 percent of wage earners would impact small businesses and economic growth, says Anthony Randazzo, director of economic research at the Reason Foundation.

President Barack Obama is chief among those confused.  He appears to be concerned with the health of small businesses in America, but at the same time is proposing policies that will hurt businesses large and small.

  • The president suggested that helping small businesses is vital to economic recovery and proposed a permanent extension of the research and development credit established by the Bush administration.
  • He also argued for letting businesses write down 100 percent of their capital investments over a one-year time frame, instead of the current three to 20-year process.
  • However, at the same time Obama also proposed allowing income tax rates on those making more than $250,000 to go up, which will hit small business profits, since those profits are often filed as individual income.
  • Obama also defended letting rates go up for wealthy taxpayers on investment profits, including capital gains and dividends.

Politically speaking, increasing taxes for the wealthier segments of society is popular, even though the wealthiest 10 percent already pay 70 percent of federal taxes.  But what is often misunderstood is that small business owners will take a substantial hit from these taxes.  The Tax Foundation recently estimated that 39 percent of the proposed $629 billion tax increase on high-income taxpayers would be extracted from business income, says Randazzo.

Source: Anthony Randazzo, "The Tax Man Cometh," Reason Foundation, October 15, 2010.

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