Will a Tax Hike On “The Rich” Mean Fewer Jobs?

President Obama and the Democrats have spent almost two years enacting unpopular legislation while economic misery continues.  Thus, a disastrous election looms and out of desperation they’re reviving an old campaign strategy, appeals to envy and resentment of “the rich.”

Under existing law the Bush tax cuts, enacted in 1993, will expire at the end of this year.  Everyone who pays income tax will see an increase if Congress doesn’t act.  Even though they have not yet written legislation the Democrats claim their intent is to extend the lower, Bush tax rates for everyone who earns less than $200,000 per year, but not for “the rich.”

On Fox News Sunday Host Chris Wallace asked Austin Goolsbee, newly appointed Chairman of the President’s Council of Economic Advisers if a tax increase on “the rich” would mean a tax increase on small businesses.  Goolsbee’s reply began with the Democrats’ constantly repeated talking point:

First is what is the definition of a small business?  Ninety-seven percent of small businesses are totally unaffected by raising the top marginal rate…

According to IRS 2008 data, the most recent available, 93% of small business owners reported less than $200,000 income.  So Mr. Goolsbee exaggerated but not by a lot.   It is true that only a small portion of the total of all small business owners are in the over $200,000 bracket.  But that’s an irrelevant statistic.

Every taxpayer who engages in a business activity must submit small business tax forms and is counted in the small business. Thus, the category, “small businesses” includes tens of millions of one or two person or even part time businesses. Most of these very small businesses will never hire employees.

The businesses that are in a position to hire additional employees are the “larger” small businesses that generate more revenue and more taxable profits.  Those are the businesses in the over-$200,000 tax bracket.  To determine if increasing the top tax brackets will affect a significant number of job creating small businesses the relevant questions are:

  • How many small businesses are there in the over $200,000 bracket?
  • What portion of all small business income is earned by those in over $200,000 bracket?

Fortunately, the IRS has data to answer these questions.  As the charts show more than two million taxpayers who earned over $200,000 were small business owners, and they earned 63% of all small business profits.

Most of the new jobs in America are created by these people and are funded by reinvesting these after-tax business profits.

The Bottom Line:

No matter how they try to spin it, no matter what irrelevant statistics they cite, Obama and the Democrats can’t escape the truth: Higher tax rates on “the rich” means higher tax rates on some two million businesses that are the primary job creators in America.  Increasing their tax burden will reduce the number of jobs they are able to create.

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