GOP Pledge To America: Small Businesses & Jobs

A proposal to spur job creation

On Thursday Congressional Republicans published a campaign document called “A Pledge To America.”

Some of the Pledge is typical politics-speak.  For example, the forward summarizes all our current economic and political troubles in one assertion, in a bold font:

“Washington has not been listening.”

Like most of the communication from the Obama Administration, this statement is designed to elicit an emotional response without actually saying anything the Republicans can be held accountable for later.

But there are some genuine proposals for dramatic change for the better and one is particularly impressive. The “Bush Tax Cuts” enacted in 2003 will expire at the end of this year unless Congress acts to extend them or make them permanent.  President Obama wants to extend the reduced tax rates except for those earning over $250,000.  Some Democrats want to allow all the reduced tax rates to expire resulting in a substantial tax increase for everyone who pays income taxes.  The Republican pledge includes the promise to make the Bush tax cuts permanent and this new provision:

We will allow small business owners to take a tax deduction equal to 20 percent of their business income. This will provide entrepreneurs with a much-needed infusion of capital for investment and new hiring.

This is an amazingly bold proposal in the current political climate.  The media don’t seem to have noticed it yet but when they do we expect a lot of yelling about a give-away to “the rich.”  But in reality this proposal would allow small businesses to keep Billions more of their profits than they can now.

If combined with relief from the maniacal new health care mandates and a reduction in regulatory intervention this proposal would provide Billions in capital to small businesses to reinvest in expansion and job creation.

Below are two tables that illustrate what this would look like in the real world.  In the first table is a hypothetical small business owner with $300,000 in taxable income who spends $150,000 per year on his personal and family living expenses.  The second table is a hypothetical business owner with $800,000 of taxable income who spends $250,000 on personal expenses.

Obviously nothing would prevent a business owner from spending any tax savings on personal luxuries rather than expanding his business.  But generally that is not how business owners behave.  One does not build a business from zero up to $300,00 or $800,000 in taxable income without substantial, continuous reinvestment of profits.  The natural human desire for greater security encourages business owners to expand their businesses rather than expand to a more costly life style. 

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