· November 20, 2012

Claim that leaving top 2% out of Bush Tax Cut extension will hurt small business – Not True

A common talking point from the Right is that no extension of the Bush tax cuts for the top 2 percent of incomes in the U.S. will hurt small business. Our research is not finding evidence that this is true. First, let’s hear what House Speaker John Boehner, (R-OH), has said recently about the Bush tax cuts and small businesses:

“Raising taxes on small-business people is the wrong prescription given where our economy is.” “Raising taxes on small businesses will kill jobs in America. It is as simple as that.”

Actually, it’s not so simple. The Treasury Department released a report in 2011 that tried to better define what a small business is and who exactly are the small business owners in America. The report found that very few small business owners face the top two tax rates. Treasury found that only 2.5 percent of small business owners, and 7.9 percent of filers with any income from small businesses that employ people, face the top two tax rates. Only 0.5 percent of small business owners, and 3.3 percent of filers that receive any income from small businesses that employ people, make $1 million or more per year. Giving a tax break to high income Americans would be giving a very large benefit to people who overwhelmingly do not work at or run small businesses. Additionally, studies have shown that lowering the tax rate for small businesses is not the best policy option for encouraging owners to do more hiring. The Congressional Budget Office concluded that even though some small businesses would benefit from an extension of the Bush tax cuts this would not create more jobs in the current economy. The study found that while the cuts would increase after-tax income for these businesses, this alone is not a strong incentive for hiring because small business production is mostly governed by demand for their products. Instead, CBO concluded that the more efficient way to stimulate economic activity would be through extending the Bush tax cuts for low- and middle-income families and not letting that potential demand leave the economy. Allowing the rates to expire for the top two brackets and extending the rest would be the most cost effective way for the federal government to increase growth and jobs per dollar of cost.