NCPA - National Center for Policy Analysis

The Future of Tax Policy: Implications for Small Business and Entrepreneurs

April 26, 2012

For American businesses large and small, anticipation of future changes to the U.S. tax code is essential.  Firms must make significant decisions regarding expansion, hiring and production for the long term, and the tax structure will significantly alter the costs and benefits of such choices, says Douglas Holtz‐Eakin, president of the American Action Forum and former director of the Congressional Budget Office.

To this end, the American Action Forum has attempted to create a guide to the potential tax policy outcomes for the next year.  Researchers have outlined three possible scenarios and the probable outcomes of each one.

The "autopilot" scenario consists of the failure of White House leadership to avoid large tax increases at the end of 2012.

  • The autopilot scenario would hurt overall economic growth through a number of detrimental effects, not the least of which is the burden it places on small businesses.
  • It would result in the loss of between 300,000 and 2.9 million jobs.
  • The higher marginal tax rates would reduce the probability of employers adding to their payroll by 18 percent and reduce payroll growth by 5 percent overall.
  • The probability that a small business chooses to expand would fall by 15 percent.

The president's proposals for tax changes would have similarly harmful effects.

  • The president's planned policies would have the aggregate effect of higher taxes and larger deficits.
  • Businesses would likewise be harmed by the implementation of a minimum tax policy on overseas profits that pushes tax reform in the wrong direction.
  • Higher capital gains tax rates would reduce incentives to save and invest.

The budget approved by the House of Representatives would reform entitlements and the tax structure.

  • The approved spending by the House would reduce distortionary subsidies and lessen the government's interventionist role.
  • It would also reform unsustainable spending by entitlement programs to help them remain solvent for the next generation.
  • Finally, it would preempt higher taxes, thereby creating a friendlier environment for American businesses.

Source: Douglas Holtz‐Eakin, "The Future of Tax Policy: Implications for Small Business and Entrepreneurs," American Action Forum, April 2012.

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