In a March 9 Wall Street Journal Guest Editorial, Obama Economic Adviser Laura D’Andrea Tyson attempted to overcome growing opposition to ObamaNomics, with several deceptions. This is the second in a series of posts exposing those deceptions. Click on the ObamaNomics logo to see the first.
President Bush’s tax cuts are scheduled to expire at the end of 2010. At that time, assuming the economy has entered a recovery, President Obama’s budget will restore the top two marginal income tax rates to their 1990s levels of 36% and 39.6% for individuals earning more than $200,000 and couples earning more than $250,000. These changes will affect only the top 3% of taxpayers, the group that has enjoyed the largest gains in income and wealth over the last decade.
She hopes the reader’s response will be envy as he imagines these top 3% indulging in extravagant luxuries while the rest of us tighten our belts and/or fear losing everything. Our reaction is supposed to be, “So what if they buy only 10 diamond baubles instead of 12?” This emotional response ignores the real costs that will be born by others in the economy, especially those who have lost or may lose their jobs.
Ms. Tyson then tries to head off the valid criticism that small businesses will be forced to curtail expansion plans and job creation when they are hit with tax increases:
Critics charge that President Obama’s tax rates for high-income earners will strangle small business and stifle economic growth. Such claims are misguided or disingenuous. A full 97% of small businesses will see their rates unchanged or enjoy additional tax benefits under the Obama plan.
Ms. Tyson apparently hopes we’ll assume this means 97% of small business job creation will be unaffected by the tax increase.
Ms. Tyson exaggerates the fraction of small businesses earning less than $200,000. IRS data show about 94%. But what’s most important is this statistic is irrelevant to the tax increase debate.
Ms. Tyson generates this deceptive statistic by herding every taxpayer who completes the IRS forms for reporting non-wage income from a business activity into a single category she calls “small business.” This category of taxpayer includes millions who engage in “side jobs” and part time ventures, like selling t-shirts on Ebay and pot holders at craft shows. This category also includes millions of one-person businesses, like the locksmith or tree trimmer who operates out of a vehicle.
Creating Jobs by Reinvesting After-Tax Profits
Also included in Ms. Tyson’s huge category of taxpayers are larger businesses, such as construction, or restaurant, or software firms, with several employees, who are in a position to grow and create more jobs by reinvesting profits. These are the businesses with more than $200,000 in taxable profits, who will be hit by Obama’s tax increase. Every dollar of increased taxation, is one less dollar available to reinvest in expansion and job creeation.
Here are some data – some hard facts – from the IRS Statistics of Income Division for 2006, the latest available:
- 54% of taxpayers reporting more than $200,000 in income were small business owners.
- 61% of of all small business income was reported by taxpayers earning more than $200,000.
- 2.2 Million small business owners reported more than $200,000 in income.
As the figures above demonstrate, more than half the over $200,000 taxpayers Obama intends to punish are businesses that are large enough to have several employees now, and the potential to expand and hire more employees in the near future.
This segment of the “small business” category creates nearly all the new jobs in America, year after year.
The Bottom Line
More small business expansion is funded by reinvesting after-tax profits than by borrowing. Since bank lending contracted last summer small business access to credit has virtually disappeared. Therefore, after-tax profits are even more critical if businesses are to expand and hire more people.
Since the government has no system to identify and count the jobs that won’t be created as a result of tax increases on businesses, Obama hopes we voters won’t realize what happened.
Government will be seizing from the private sector some of the resources that empower free people to use their liberty to create prosperity. These resources will be used to expand government power and reward special interest constituencies with political connections.