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Obama Giveth and Obama Taketh Away

February 02, 2010

By Josh Barro

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In his State of the Union, President Obama mentioned “small business” 14 times. He talked about his desire to subsidize lending to small businesses, to give them tax breaks, to help them export to other countries, and above all to get them to create jobs.

The President talked a lot about what he’s going to do for small business, but not a lot about what he plans to take from it. Small business owners wouldn’t have been happy to hear that he plans to impose at least $37 billion in additional taxes on them every year, far outstripping the value of the goodies he’s offering them. That’s in addition to the costs that health reform and cap-and-trade could impose. Overall, the president’s agenda is far worse than a wash for small business.

Let’s start with the plus side of the ledger. What small business goodies did the President tout in the State of the Union?

The first is a proposal to use $30 billion from TARP to encourage community banks to lend to them. Small businesses have been hit particularly hard by the contraction in credit markets, partly because many small business owners were using the loose consumer credit market to finance their enterprises.

It is difficult to calculate the value of this proposal -- because the $30 billion represents money loaned, only a fraction (representing the subsidy provided by the government) is truly a transfer, and part of the subsidy value will be absorbed by the banks. The value of this proposal to small business is likely relatively small.

The second proposal is a tax credit for job creation by small businesses. The president’s budget reserves $100 billion for a “jobs initiative” over the next few years, but this credit will be just one of many components, along with new infrastructure spending and additional aid to states. This is likely the largest of the proposals to help small business, but we won’t know its exact form and scope until the legislative process is further along.

Finally, the President proposes to eliminate capital gains taxes on small business investments. Unlike the profits of large corporations, only a small share of small business profits are realized and taxed as capital gains -- mostly, small business profits are passed through to owners and taxed as earned income. As a result, the fiscal impact of this proposal is small, just $8 billion spread over the next decade.

While the size of aid to small businesses is uncertain, we know the added burden on them will be large. The President’s budget proposes to return the top two income tax brackets to their Clinton-era levels, taking the top rate from 35% to 39.6%. Additionally, high-income filers will see the value of tax deductions fall due to the return of deduction limits suspended by the Bush tax cuts.

Because most small business income is passed through onto owners’ personal income tax returns, this represents a significant tax increase on small business. The Tax Foundation estimates that the return to Clinton-era treatment of high earners represents a $36.5 billion annual increase in taxes paid by small businesses.

This is just a floor, though. The Tax Foundation estimate does not include the effects of an additional proposal in the Obama budget to calculate tax deductions based on a 28% tax rate, even where the taxpayer faces a higher rate. This likely pushes the annual small business tax bite over $40 billion -- a bit less than half of the total annual tax hike on high earners.

Furthermore, many Democrats in Congress are talking about additional taxes on high income earners. The House version of the health care bill would raise the top income tax rate to 45%, while the Senate bill would add a Medicare tax surcharge at high income levels. Either proposal would further raise the tax bill paid by small businesses, and reduce funds available to hire and expand.

Family-owned small businesses also have good reason to be concerned about estate taxes. President Obama has taken a middle-of-the-road approach here, which would make permanent a reduction in estate taxes but not move to full repeal, as was envisioned in the Bush tax cuts. Until Congress acts on the estate tax, small business owners won’t know how much of their wealth they can pass on at death.

Outside of taxation, small business owners are worried about other government activity. Health care reform will have uncertain effects on health care premiums paid by employers, and both versions of the bill impose new obligations on employers to offer insurance or pay penalties.

And despite “Green Jobs” rhetoric, carbon regulation would raise costs on businesses that depend directly or indirectly on fossil fuels -- which is to say, substantially all businesses.

Unfortunately, the administration has chosen a “give and take” approach to small business -- it takes a lot, and then gives back something when it feels like it. Small businesses are being offered a high-profile basket of goodies, but they also know they face large and uncertain costs from future government actions. This does not create a positive environment for investment or job creation.

The deficit is big, new government programs are expensive, and it’s not surprising the administration is looking for new revenue. But if it wants to restart the “economic engine” of small business, layering on the new taxes is the wrong approach.

Original Source: http://www.realclearmarkets.com/articles/2010/02/02/obama_giveth_and_obama_taketh_away_97619.html

 

 
 
 

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