Democrats’ Ugly War On Small Business

For nearly a century Democrats have encouraged voters to indulge the ugly and self-destructive emotions of rage and resentment against “the rich.”  Denouncing the rich has been a core Democrat Party campaign strategy.  When they won elections Democrats harmed the economy and the non-rich by using government power to express these futile emotions through the tax code.

In the 2016 Presidential race Democrats are plowing the same old ground.  There has been almost no media exposure of the Democrats’ most recent debate, but resentment and loathing of men and women who are and always have been the heroes of the American economy, was a prominent theme.

Hillary Clinton assured the audience:little-hillary-flipflop

You know, the American president has to both keep our families safe and make the economy grow in a way that helps everyone, not just those at the top…Look, I have said I want to be the president for the struggling, the striving and the successful. I want to make sure the wealthy pay their fair share, which they have not been doing.

Senator Sanders bellowed:little-sanders-cnn

First statement is, we tell the billionaire class, “they cannot have it all.” For a start, they’re going to start to pay their fair share of taxes.

Later on, when the debate topic was jobs and middle class angst, Mrs. Clinton contradicted herself:Dem 2016 Debate

I also want to create jobs and I want to be a partner with the private sector. I’m particularly keen on creating jobs in small business…I want to do more to help incentivize and create more small businesses.

After a look at the relevant numbers we’ll show how Mrs. Clinton’s promised tax increase contradicts her promise to create more jobs and more small businesses and why punishing the rich with tax hikes is more harmful to the non-rich, middle class than to the despised wealthy.

2013-fair-shareEach year the IRS publishes exhaustive tables of statistical data.  While most economic headlines are about estimates that are  usually called “studies” extrapolated from indirect sources of data, the IRS publishes accurate, precise data drawn directly from tax returns.  The most recent IRS data, just published, is from the 147 million 2013 tax returns, that were submitted in the spring of 2014.

Democrat candidates always tell us the top one percent don’t pay their “fair share.”  So let’s go to the IRS data and look at what those candidates never disclose: what share of total tax revenue the highest income taxpayers actually do pay.

The pie charts show that in 2013 a tiny fraction of taxpayers, a little less than one percent, earned over $500,000. Yet their share of taxes paid was 35%. 

Put another way, ONE out of every 136 taxpayers pays $350 of every $1,000 the IRS collects. 

The national media, captivated by Donald Trump’s campaign of childish insults and loony, impossible to implement schemes hasn’t bothered to ask Mrs. Clinton or Senator Sanders what share of taxes paid would be “fair.”  But whenever Democrat candidates have been asked their answer has always been the same:  MORE!

What do we know about these highest income earners and how do they earn their wealth?  As the chart below shows, most of them – 89% – are business owners.

These businesses are organized – in IRS speak – as “pass through entities.”  They are sole proprietorships, S-Corporations, LLCs and partnerships and do not submit business tax returns like large corporations.  Instead all business revenue, expenses and profits “pass through” to the owners’ personal tax returns.  According to census data 55% of all business employment is in pass-through companies.business-owners

Typically, these owners keep a portion of profits for personal/family consumption and leave a portion in the business to reinvest in improvements, upgrades and expansions or to pay down debt. But both portions are combined and reported on a single tax return which does not differentiate.

Most of these 951,000 high income taxpayers are the owners of of the “middle market” businesses that create nearly all the new jobs in America.

Middle market is generally defined as a business with annual gross sales in the millions.  They’re bigger than “small businesses” with less than $1 million in sales and – typically – a dozen or fewer employees, but smaller than “big business,” the huge corporations with annual sales of tens or hundreds of billions and thousands of employees. One survey found that middle market businesses  average 367 employees.

Should the rest of us, the 99% who earn less than $500,000, be for or against taxing away more of the profits of these businesses?  Is there a downside that Democrats’ emotionally charged campaign slogans don’t disclose as they encourage us to resent these business owner taxpayers? 

Yes.

These high income business builders don’t react to tax hikes by moving their families into smaller homes or buying cheaper cuts of beef.  When government shrinks their after-tax income they react with shrinking investments in start-ups and expansions that generate new jobs and raise the demand for employees which results in higher wages.    This is why Mrs. Clinton’s call for targeting these specific business owners for higher taxes directly contradicts her promise to help business create jobs.

In a rational world the government would set lower, not higher tax rates on these entrepreneurs and investors.

How about a zero or near-zero tax rate on small and middle market business owners? Nothing the government could do would juice the economy and increase the demand for employees more rapidly.  But no politician would dare suggest it because most voters have been indoctrinated in the economics of envy and resentment.

So, instead of freeing entrepreneurs and investors to do what only they can do, government tries to run the economy via subsidies of politically favored companies and restrictive regulations of out-of-favor sectors like oil and natural gas production.  For many decades Democrats have won elections by attacking entrepreneurs and investors for “greed” and promising to punish them with even higher taxes.

In our next post we’ll look at the actual results of the most recent tax hikes on “the one percent.”

 

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