Unemployment Is The Cost of a Tax Hike on The Rich
After deliberately, adding more than $2 Trillion to the federal debt in his first 18 months in office the President and the Democrats are beginning to feel a sense of foreboding.
They have suddenly pivoted from profligate spending to seeking ways to wrench more money out of the private sector into the government till. 
The first group Democrats want to suffer tax punishment as a result of the Obama deficits is “the rich,” defined as earning over $200,000, who are now targeted for a tax increase.
The problem with a tax hike on “the rich,” as more and more Republicans are finally saying out loud, is that it’s also a tax hike on the small business sector that creates most of the new jobs.
But Democrats and their cheer leaders in the media are not impressed by this argument. In an article titled “GOP Fairy Tales” Mother Jones writer Kevin Drum echoes the claim being heard all over Washington:
…only 1.9% of small businesses are in the top two tax brackets that would be affected.
Mr Drum apparently thinks the reader will conclude that this means an insignificant effect on small business job creation. But this is fallacious reasoning. It’s true that a small minority of business owners are in the over $200K bracket, about 10% according to IRS statistics from 2007, the latest available. But these are the very businesses that can create the most jobs, because they have the most after tax profit to reinvest.
The important statistic is not what fraction of small businesses earn a lot but what fraction of the group being targeted for a tax hike is small businesses. It turns out that most high income tax payers receive part or all of their income from business ownership.
Millions of small businesses are part time and/or employ nobody but the owner. Millions more are just a bit larger, employing the owner plus one or two people. Only a tiny fraction of those “very small” businesses will emerge as growing enterprises that create any jobs.
The small businesses that create most of the new jobs in America are the very ones the Democrats have targeted for tax increases, the businesses with enough profits left over after supporting the owners to reinvest in expansion and job creation.
Creating Jobs by Reinvesting After-Tax Profits
The businesses that will be hit by the tax increase are the larger “small businesses” that DO create jobs, such as construction, or restaurant, or technology firms. These businesses create new jobs by reinvesting profits. Every dollar of increased taxation, is one less dollar available to reinvest in expansion and job creation.
The Bottom Line
- More small business expansion is funded by reinvesting after-tax profits than by borrowing. Since the banking crisis began in 2008 small businesses have suffered dramatically reduced access to credit. Therefore, after-tax profits are even more critical if they are to expand and hire more people.
- Government has no system to identify and count the jobs that won’t be created because of tax hikes on “the rich.”
- Through tax increases on “the rich” Government will seize from the private sector some of the resources that empower free people to use their liberty to create prosperity. Politicians will use these resources to support expanded political power and reward special interest constituencies with political connections.
Jeff,
Two issues.
First, are you using an apples-to-apples comparison? The Tax Policy Center report that Drum’s referring to specifically mentions 650,000 filers and not 3 million as indicated in your pie chart.
(The TPC includes a definition of small business: any tax unit that receives any income (or loss) from a sole proprietorship, farm proprietorship, partnership, S corporation, or rental income.)
Second, in addition to the TPC’s report, this 2005 report from UFE includes a chart of tax changes and the employment rate:
Looking at it, it’s pretty hard to demonstrate that there’s a link between lower tax rates and lower employment. Read the UFE report for more – the charts are telling.
Victor…
Agreed that only a small fraction (10%) of small business taxpayers are “rich.” But if you read the article you’ll learn why that statistic is irrelevant. It’s a diversion, meant to confuse people who aren’t paying close attention.
The report you cite asserts that “normal” job growth over two years would have been 6 million. But it doesn’t say where that figure comes from. What makes 6 million “normal?”
The Clinton Administration achieved that benchmark in only one of it’s 7 two-year periods.
And, once again, the increase of 1.9 million jobs in the first 17 months after the 2003 tax cuts is a whole lot better – and closer to “normal”- than the LOSS of 2.5 million jobs in the first 17 months after the Obama “stimulus.”
Jeff,
We’re not in agreement about your 10% number – in fact, we’re not even close. The TPC cites 650,000 filers with small business income who are also in the top two tax brackets, and you cite 3 million. That’s a pretty large discrepancy.
You asked what’s normal: look at the UFE report again – specifically, page 6 of the PDF. Here’s the quote:
(The UFE report cites this EPI report.)
Finally, when you look at Figure 6 of the UFE report (I wasn’t able to post an image link, but it’s here), you see a chart of employment rates over time, with years of tax hikes and cuts highlighted.
If the central assertion of your post is that “unemployment is the cost of a tax hike on the rich,” that returning to Clinton-era rates for the top two tax brackets will “punish” the small business owners who are most successful at creating jobs, that “government will seize from the private sector some of the resources that empower free people to use their liberty to create prosperity,” the reports from the CBPP and the UFE offer compelling evidence otherwise.
Victor…
Obama’s definition of “rich,” targeted for a tax increase, is over $200K for single filers and over $250K for joint filers. IRS tables break taxpayers into income segments. $200K, (AGI) regardless of filing status, is one of their break points.
The pie chart shows all taxpayers over $200K. 68% had small business income. IRS tables are compiled from actual tax returns are thus more accurate than estimates from political pressure groups.
Your chart of employment fails to show three tax cuts and one tax increase. It represents 1987 as a simple tax decrease when it was, for many upper income taxpayers, an increase.
Missing are the rate reductions in all tax brackets phased from 1981-83, the tax rate increase of 1990 (When GHW Bush broke his read-my-lips pledge) the major cap gains tax rate cut of 1995, and the major, across-the-board tax cuts of 2003.
It misrepresents 1987 as a tax decrease when it was intended as neutral tax simplification, not tax reduction. Reduced rates were more than offset by ending tax shelters for upper income taxpayers. Those who had invested in tax shelters saw substantial tax INCREASES as a result of 1987.
1987 also INCREASED the cap gains rate from 20% to 28%.
This would seem to be a chart with an agenda!
Victor…
Your quote simply asserts, without explanation, that “normal” job growth is 4.1 million over 18 months, and that to be considered successful the Bush tax cuts should have produced 6.5 million jobs in 18 months.
Average job growth for 190 eighteen month periods from from end of 1981-82 recession to beginning of 2001 recession, EXCLUDING 18 periods with losses due to the 1990-91 recession, was 3.6 million. The most new jobs in any 18 month period EVER was 6.03 million.
So again, how did these anti-Bush partisans come up with these “normal” figures?
BTW of those 190 eighteen month periods, the top 11, and the only ones that exceed 6 million were in ’84 and ’85 in the wake of the Reagan tax cuts.
Jeff,
I’ll try to respond to both your previous posts in this one reply.
First, re: the “rich” – if you prefer, we can use the term the IRS uses, “high income tax returns.” That’s not President Obama’s definition: as you say, he’s using breakpoints that have been in place since the Tax Reform Act of 1976.
Re: the 68% – it’s an estimate, not a fixed number, at least according to the Treasury Department (who actually came up with 75% in 2007 instead of 68%, according the article below).
One of Politifact’s just-published Truth-O-Meter statements “So-called wealthy are actually small business owners? The data is dubious” addresses the exact same issue we’ve been debating. Relevant paragraphs:
It’s entirely possible that, in light of above, that the TPC chose to look at the problem from the perspective they did in order to come up with more concrete numbers, hence their original 1.9% figure.
Second, re: UFE’s Figure 6 chart of tax rates and unemployment – the report specifically addresses their methodology:
However, if you’d like to update the chart with your highlights, I’d be interested to see how it compares. Also, and more important: in your list of what the UFE may or may not have left out, you leave unaddressed the 1950 and 1993 tax increases, both of which coincide with rising employment.
You say the chart seems to have an agenda. Not just seems: it absolutely does, especially when it’s in the section of the report entitled “No Correlation Between Tax Cuts and Job Creation”
Third, you asked, “how did these anti-Bush partisans come up with these ‘normal’ figures?” Take another look at the EPI report – the figures come directly from President Bush’s Council of Economic Advisers:
It’s the CEA that are saying “this is what would have happened without the tax cuts, and this is what we project will happen with them.”
Victor invokes: “Politifact’s just-published Truth-O-Meter statements”
Who? Anyway.
“So-called wealthy are actually small business owners? The data is dubious” addresses the exact same issue we’ve been debating. Relevant paragraphs:
Yikes!! What a worldview!!
Consultants are small businesses, and employ people.
Public speakers have agents; they help employ people.
Laws firms and medical practices prosper, and employ people.
And then there is me: an investor. Here’s the deal Dicktor, er, Victor, I invest my own money, widows and orphans money, teachers money, public employees money, corporate employees money, medical foundations money all for the benefit of their retirement, including my retirement.
Our Firm actively manges the enterprises and has created tremendous increases in sales, earnings, employment and, yes, taxes, in the companies we have invested in. How about you? You employed anybody?
But here is the current reality. Small business owners, investors such as myself, are pulling in their horns because of tax issues (cap gains and carried interest) and the general anti-business attitudes of this Congress and Administration. Its a travesty and not in the interest of the Average Joe.
You need to stop the contorted logic, get your head out of this statistical circle jerk, and wake the fuck up.
Wonderful post. You are quoted and linked.