All eyes are back on Congress as the lame duck session continues. One topic on everyone’s mind: extending the Bush tax cuts. In fact, the showdown over the cuts is likely to be one of the biggest policy fights of President Obama’s term to date.
For months, the Administration officials said they would only accept an extension for the middle class, and fully intended to raise rates on “the wealthy” (defined as those making over $250,000 per year). So who are “the wealthy,” exactly?
In many cases, the “wealthy” are small businesses.
Given that many small businesses aren’t structured as formal corporations, their owners file as individual taxpayers – meaning they are subject to increases in the income tax rate. According to the Internal Revenue Service’s 2008 Statistics of Income Data, there are 30 million small business owners in the country – 22 million sole proprietors, and 8 million partnerships and S-corporations. Ryan Ellis, director of tax policy at Americans for Tax Reform, estimates that two-thirds of small business profits face tax rate hikes under the White House’s plan.
Those successful small businesses – the ones with profits – are the ones who hire workers. They are the ones who purchase goods and services from other companies. These are the people who will be hit with tax increases. In an increasingly interconnected economy, it is impossible to penalize the few without injuring many. Pillaging these businesses' profits will mean less expansion, fewer jobs, and diminished output and will decrease incentives to be successful.
Many “wealthy” small business owners are women. According to the Oct 2010 Department of Commerce report “Women-Owned Businesses in the 21st Century,” 6.7 percent of all women-owned firms had sales of $250,000 or above in 2002 – a year that boasted 6.5 million women-owned firms in total. Breaking those numbers down, that means that 435,500 women-owned firms saw sales of $250,000 or above. Given the number of women-owned businesses jumped to 7.8 million in 2007, that number is sure to rise (the Census Bureau will release more detailed data from 2007 regarding women business owners in December 2010). The report goes on to note, however, that women-owned businesses are often smaller than men-owned businesses, and "average sales/receipts for women-owned businesses are only 25% of average sales/receipts for men-owned businesses." With a narrower margin, higher taxes bills can mean the difference between staying open or shutting the doors for these companies.
The “wealthy” are also the upwardly mobile. Americans are an aspirational people. Although many Americans are not “wealthy” in the White House’s eyes, many would like to be. College enrollment continues to increase, demonstrating the priority that individuals place on education as the stepping stone to a better life.
In addition, entrepreneurship – the very essence of trying to better one’s station in life – has long been a hallmark of the American economy; the Small Business Administration’s September 2010 report “Global Entrepreneurship and the United States” ranks the U.S. third out of 71 countries on its Global Entrepreneurship and Development Index, which provides a comprehensive measure of entrepreneurship drawing on economic freedom, competitiveness, and entrepreneurial activity. Women have taken advantage of the United States’ business-friendly environment; according to “Women-Owned Businesses in the 21st Century,” between 1997 and 2007, the number of women-owned businesses grew 44 percent – twice as fast as men-owned businesses.
The American economy is extremely dynamic, and income mobility is considerable. A 2007 report from the U.S. Treasury Department notes “the analysis found that more than half of taxpayers (56 percent by one measure and 55 percent by another measure) moved to a different income quintile between 1996 and 2005.” Importantly, however, not only do people have the chance to move up, but the top bracket is not set. The report also states that, “the composition of the very top income groups changes dramatically over time. Less than half (40 percent or 43 percent by different measures) of those in the top 1 percent in 1996 were still in the top 1 percent in 2005.” Taxing the “wealthy” doesn’t just affect those at the top, but slows the ascent of those who dream of making it to the top, discouraging the innovation and hard work needed to grow the economy.
And bear in mind – although $250,000 seems like a high benchmark, it’s certainly possible for a couple of Chicago schoolteachers or public officials to hit that threshold.
Despite the government’s best efforts at class warfare, to attack “the wealthy” will only serve to slow the overall economy – hurting everyone in the process. In order to maintain the nation’s global competitiveness, it is critical to not raise rates on engines of growth and mobility. By penalizing the most productive members of society, small businesses, and entrepreneurs, our country’s leaders will discourage the virtues that made this country great. The only true solution to the nation’s fiscal crisis is for the economy to grow – not to tax itself to irrelevance.