Tax the Wealthy or Reduce Jobs?

With Congress set to debate extending the Bush tax cuts, there are risks to small business from raising taxes on the “wealthy”.

US Treasury Secretary Tim Geithner gave a speech yesterday in Washington on the Obama administrations economic case for raising taxes on high earners.

He states, “….But given the size of the deficits and debt that we inherited, we must provide that tax relief in a fiscally responsible way. We believe the best way to do that is by allowing the tax rate for the top 2 percent to go back to levels seen at the end of the 1990s, a time of remarkable growth and economic strength.”

”Others have suggested we delay, by extending all Bush tax cuts temporarily, for a year or two. But the world is likely to view any temporary extension of the income tax cuts for the top two percent as a prelude to a long term or permanent extension. That would hurt economic recovery by undermining confidence that we are prepared to make a commitment today to bring down our future deficits. Fiscal discipline requires hard choices and we must be prepared to make them.”

Contrast Geithner’s argument with what small business believes. The NFIB or National Federation of Independent Business has released a statement on taxes. Entitled “The Small Business Tax Increase Clock is Ticking”, the report states:

“Small businesses created 2/3 of the net new jobs in the last decade. With small businesses struggling to recover from the recession and unemployment near 10 percent, no small business should face a tax increase.” They are concerned that a tax increase for the “wealthy” will negatively impact their members as it will effect 75% of small business.

Here’s why according to NFIB

* According to an NFIB poll, 75 percent of small businesses are organized as pass-through entities (sole proprietors, partnerships, S Corps, etc.), meaning they pay taxes on their business income based on the individual tax rates.

* Increasing the individual rates will mean that business owners have less money for business investment and job creation. One study found that a 5 percent increase in individual tax rates decreases business investment by 10 percent. (Robert Carroll, “Entrepreneurs, Income Tax, and Investment, January 1998).

* Raising the tax rates on the top two income brackets also has a negative impact on small business job creation. Based on an NFIB small business survey, the businesses most likely to face a tax increase by raising the top two rates are businesses employing between 20 and 250 employees. According to U.S. Census data, businesses with between 20 and 299 workers employ more than 25 percent of the total workforce.

This is important for Congress and the White House to understand if they want to stimulate job growth. Also, this is a critical point for those on the President’s deficit reduction panel and for those supporting the Wyden-Gregg tax-reform bill. If you raise top tax rates, this will impair small business job creation and investment.

This article originally appeared on CNBC.com on August 5, 2010