A New York Times report tonight sheds some light on the debate on whether ending tax cuts for the top 2%, which is how Obama proposes to deal with the pending expiration of Bush tax cuts, will, as low tax stalwarts contend, hurt small businesses.
Although my sample is anecdotal, it strongly says not, and more systematic analyses supports that view. Most small businesses are not profitable enough to provide enough income to put owners in high enough brackets for the tax increases to make a difference; per the Joint Committee on Taxation, 97% of business owners would not be touched by the proposed tax increases. And I would bet a pretty high proportion of those who would be are high end professionals (think doctors, attorneys, larger accounting firms) who might not like a tax increase, but are not going to make changes in how they operate their firm based on it. The Times provides some corroboration for this belief:
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.
But the real cincher is that a tax increase on top earners could produce more new business formation and activity. Why? You can run a lot of expenses through them, and higher marginal tax rates make writeoffs more attractive:
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.
As someone who runs a small business, there is no question that the tax advantages are nontrivial. But most people also underestimate the difficulty and overestimate the financial rewards of setting up your own shingle.
26 comments
Comments are closed.
That elitist policies dictated by big business somehow are intended to benefit, or possibly can benefit (via some mystical trickle-down), small business is one of the most inexplicably successful scams out there.
It’s obviously false and a lie on its face, even before we get the data like this (and the data has always gone this way). How could truly progressive taxation, which harms stagnant wealth and power concentration and fosters the velocity of money, do anything other than help small entrepreneurship?
Yet the politicians and elites keep getting away with it. It seems to be the fated historical mission of the petty bourgeoisie to let itself be astroturfed against its own interest and in the interest of the elite, just like Marx said.
The reason that politicians spew this nonsense is that they are paid off by big money campaign contributions. They get away with it because the execs and owners of corporate media and their advertisers make more than $250,000 a year.
So what? There is no one listening to reason among the supporters of the tax cuts for the very rich.
The politics of envy are so twentieth century. An opiate to lead the masses off the cliff.
Get real, check out this WSJ Big Interview.
http://www.financialarmageddon.com/2010/09/we-just-added-and-added-and-added-to-the-debt.html
As long as the body-politic is going to vote for big spending, there needs to be big taxes for everyone.
Link to the story: http://www.nytimes.com/2010/09/18/business/smallbusiness/18smallbiz.html?src=busln
Sorry, Yves, but this makes no sense to me: “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.”
Being a sole proprietor has nothing to do with whether or not a business has employees. E.g., a sole proprietor might own several local stores, each having several employees. All that sole proprietor means, in the context of the tax code, is that all income and expenses of the business are passed through to the owner. See, e.g., forms for filing re: FICA, FUTA, etc. for employees of a sole proprietorship . http://www.irs.gov/businesses/small/article/0,,id=98202,00.html
http://www.irs.gov/faqs/faq/0,,id=199630,00.html
Tangentially (because LLCs are mentioned in the story), LLCs that are owned by one taxpayer are treated as sole proprietorships for the purposes of the Code unless the owner elects otherwise. So if Ben Thompson (in the story), owned the LLC himself (or with his wife if they elected to be treated as a joint venture), he (they) would generally be a sole proprietor under the tax code. According to the story, his LLC employs 1000 people.
Obviously, this does not take anything away from many of the story’s points.
With all due respect, the Times may have given the wrong impression in linking the status under the code directly to an employment assumption without further elaboration, but a lot of other studies support the notion that a lot of sole proprietorships are one man shops, think bookkeepers, computer consultants (a ton, trust me), therapists, anyone who is organized to use contractors rather than employees.
Frankly, someone would be NUTS to own several stores or have employees and not be incorporated. Not sayin’ that doesn’t happen, but you are exposing yourself to monstrous personal liability that way. Anyone with an operating brain cell would be incorporated, an S corp or LLC if you wanted pass through status.
Yves,
You are confusing tax law with corporate law. As I said above, you can be an LLC and a sole proprietorship. In fact, if you are the sole owner of an LLC, you will be a sole proprietorship under tax law unless you elect otherwise. You will also be a sole propritorship if you own an LLC with your spouse and elect to be treated as a joint venture (under the Internal Revenue Code which does not affect your status under corporate law). The story itself shows that people like Ben Johnson would elect to be taxed as a sole propritorship if his co-owner were his spouse instead of his brother (since he says he didn’t want to be taxed as a corporation).
“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.”
A more fundamental problem with the above quote is that the conclusion does not follow from the premise. I.e., even if it were true that sole proprietorships had no employees, that would not show that 90 percent of the tax cut would be derived from businesses without employees. You can’t assume that the tax cut will be distributed evenly across the various classes of business. That requires empirical evidence which the author does not provide.
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.
I couldn’t beleive I was reading this incredibly obvios mistake in the NYT, and passed it off to the paucity of editors on Friday night, but I was schoked to see you reprint this obvious falsehood in your blog. I’m a sole propreitor and certainlty have employees, as do you.
Taxes do not fund government spending. See Warren Mosler et al.
I think that’s a misreading of Mosler. Alternatively, I intentionally misread it in order for it to make sense.
Mosler explains: If you do not require people to pay their taxes in dollars, then the dollar becomes worthless. I agree with his reasoning and that conclusion. But, it does not mean that “taxes do not fund government spending”.
As just stated in the earlier sentence, if government decided to spend money without collecting taxes, then the dollar would become worthless. Almost by definition, the dollars government spends would quickly buy zero goods and services. Government could ramp up their printing to infinity. Yet, still no one would sell their labor/goods/services to the government.
The government has to tax in order for the dollars it spends to buy anything. Therefore, taxes fund government spending.
Taxes do not fund federal spending. There merely needs to be sufficient taxes to give value to money. Whether the government spends $1 trillion or $100 trillion, the same amount of taxes would give value to money.
Government spending actually creates money, and does not use tax money.
By the way, Warren and I have discussed this several times. He now agrees with me that federal taxes are unnecessary, because there are sufficient state and local taxes to give value to money. Federal taxes could be zero.
Rodger Malcolm Mitchell
If you reduce taxes while maintaining spending, then you’re creating more dollars and reducing the value of the amount that was previously in circulation. That’s a tax by another name.
>> Taxes do not fund federal spending. There merely needs to be sufficient taxes to give value to money.
And the less you cover the spending with actual tax revenue, then the less value you give to that money.
>> Whether the government spends $1 trillion or $100 trillion, the same amount of taxes would give value to money.
Sheesh.
>> By the way, Warren and I have discussed this several times. He now agrees with me that federal taxes are unnecessary, because there are sufficient state and local taxes to give value to money. Federal taxes could be zero.
Yay! I will order my free lunch from you!
“New Studies Debunk Idea that Ending Tax Cuts on Wealthy Hurts Small Businesses Although my sample is anecdotal. . . ”
Anectodal = BS. This post is garbage. No facts, just “anecdotal” musing.
Rodger Malcolm Mitchell
>> Anectodal = BS. This post is garbage. No facts, just “anecdotal” musing.
If I read the phrase “Although my sample is anecdotal” and then ignore everything else, I agree with you.
So you are saying data and analysis is garbage? Or are you saying you are unable to read carefully enough to separate out my personal observations, which I clearly flag, from the data cited in the Times?
Although small businesspeople are mini sharks the difference between you and Roy and Jamie is one of magnitude and perhaps intestinal fortitude, not of kind. Therein lies the rub, and that is why the whole discussion is besides the point.
Profit arises from the successful fulfillment of societal needs and not personal avarice. To act otherwise is to cry about not getting your own TARP. Shut up and pay the taxes. It is a priviledge.
A basic assumption behind the “tax cuts always good” myth is that money saved is ultimately invested. This isn’t true in the United States any longer. Most money saved is ultimately used for financial speculation (e.g., trading stocks and bond on the secondary markets is speculation, not investment.) Our de facto industrial policy discourages investing to increase the productive output of our economy and encourages financial speculation. Until that policy is changed, tax cuts that go to the top 2% of income earning households won’t help the economy in the short run and could hurt it in the long run (e.g., the money could ultimately be involved in debt-financed financial speculation).
As to small business owners, it would seem that there are tax arbitrage opportunities to ameliorate the tiny raise in the top marginal rate. For example, instead of taking profits out as taxable salary, invest those profits into your business to grow it, and you can cash out later to receive a capital gain at a lower rate.
I love the waste of money on studies like this. Lots of people unemployed; ore doing worthless jobs.
Or all studies “worthless”? Or is this one “worthless” because it contradicts studies and policy recommendations from other groups?
In a country of 300,000,000+, how many people should perform economics studies?
@ Gary – nice catch!
Also, the NYT view doesn’t seem to account for the possibility of a two-income family in which one spouse works for a salary and the other runs a business. I would think that would kick a lot more businesses into that upper bracket.
Er, sorry – it was @Gerry, and anon commenter caught it a bit earlier. Still an excellent point on the sole proprietorship mistake.
See my reply of 4:51 PM above, I don’t think the error is as fatal (in terms of the conclusion one can draw) as you think. It is nuts to have a business of any scale and not be incorporated, period. You do not want to eat that much liability. A sole proprietorship is very risky to run your life. It makes sense only if you are a pretty small operation (ie, the costs of running a corp are too high relative to the scale of your business).
There is absolutely no rational argument against a graduated income tax. Everything about it benefits society, and those who are taxed as well. The addiction to money is as harmful as any other addiction.
Anyone too incompetent to get along on a couple of million dollars a year should be taxed totally -out of his misery.
So, I guess the wealthy tax payer will create a sole-propritorship to save on taxes, right? How does this then circumvent the issue that increasing the marginal tax rates on the wealthy will increase the gov’t revenue conunundrum?
Reorg by any other name…just adopt the Fair Tax and get rid of all this nonsense.
Yes, state taxes with current state fiscal stances function to give the currency value, and sufficiently reduce agg demand to allow some undetermined amount of federal spending without what would be deemed ‘unacceptable’ inflation. But no way to know how much, etc.
All that means is that with unemployment where it is, it can all but be eliminated by cutting taxes (along with my $8/hr fed job for anyone willing and able to work to transition the unemployed to private sector employment) until agg demand is where we want it. And it is possible that would happen at 0 federal taxes from time to time. Right now I’d guess eliminating FICA would do the trick, but yes, circumstances might require more cuts for the given size govt that we have.
second, is increasing small business a national goal per se, or is it being proposed because small businesses employ a lot of people? probably the latter, for the most part.
Which misses the point that higher levels of agg demand cause higher levels of output and employment which causes more small business to form to compete for consumer dollars.
So maybe it’s best to say that generally it’s employment that causes small business and not vice versa? Largely through our sub contracting type of arrangements and residual service activity?
Last, right now taking dollars out of this economy makes no sense, so if there is desirable social engineering driving taxing the rich it needs to be offset with larger cuts elsewhere (or more immediate govt spending increases) if the goal is higher levels of output and employment.