House Speaker John Boehner (R-OH) would have us believe that a Senate bill to expand the payroll tax cut (benefiting 99.8% of American taxpayers) paid for by adding a 3.5%-3.25% surcharge on incomes over $1,000,000 would “hurt small business.”
“More than one-third of all small business income - “approximately 34 percent” in 2013 – would be hit by Senate Democrats’ job-crushing tax hike, according to the Joint Committee on Taxation. [Boehner] (emphasis in original)
Slow down! First, we have a new term “Job Crushing,” which should be added to the GOP list of quick condemnations of any measure designed to protect the interests of the 99.8% of the U.S. taxpaying public, as opposed to the “Job Creators,” those in the upper 0.2% who “earn” their income in finance and real estate development, availing themselves of tax havens, loopholes, and preferences not associated with the remaining 99.8%. Secondly, this statement is a real stretch.
The Center for Budget and Policy Priorities explains:
“The millionaire surtax, in contrast, wouldn’t take effect until 2013 and would hit only a tiny fraction of small businesses. According to a new Treasury Department study, 99 percent of small business owners whose small business income is taxed at the individual rather than corporate rate make less than $1 million; they account for 85 percent of small business income. The surtax wouldn’t affect these business owners at all. Individuals affected by the surtax will much more likely be corporate executives, Wall Street bond traders, and corporate lawyers than your neighborhood cleaning store owner.”
The methodology explains how the Joint Committee on Taxation and the Treasury Department can come to very different conclusions about the impact of tax policies on small business. The differences result from the definitions.
Here’s the problem:
“Previous analyses by the Office of Tax Analysis (OTA) and others (e.g., Joint Committee on Taxation, Tax Policy Center) counted a small business owner as any individual who reports flow-through income from a sole proprietorship, partnership, S corporation, farming operation or miscellaneous rental activities. Although this approach is easily implemented and understood, it is at once too broad and too narrow. The approach is too broad because it includes owners of large firms as well as individuals whose business income is negligible or who might not be engaged in canonical business activities. The approach is too narrow because it excludes owners of small C corporations. Due to these shortcomings, previous analyses of how tax law changes impact “small businesses” or “small business owners” have not been as informative as they might have been – the analysis might not address the true underlying concerns of policymakers.” [OTAT2011 pdf]
Translation: Flow through income doth not a small business make. Under the previous, broad, definition anyone reporting any “small business” income came under the umbrella — including large hedge funds and expansive lobby shops in Washington, D.C. What hasn’t been included are small “C” corporations like independent contractors and single proprietorships. The Office of Tax Analysis technical paper, issued in August 2011, provides a more precise method for defining a small business, as that term is commonly understood. (pdf)
While Speaker Boehner’s statement may be “technically” correct, it is extremely misleading, relying as it does on older, less precise, measurements of who or what constitutes a Small Business. Under Boehner’s definitions, those who report any income from small business activity, who have an “S” schedule corporation, or who manage hedge funds in the financial sector fall under the expansive definition of a “small business.” This puts your local independent book shop owner in the same category as a K-Street Lobby Shop or a Wall Street Hedge Fund.
There are other, more realistic, problems with the Senate bill which have little to do with the Three R’s (Repetitive Republican Rhetoric) the first of which is that the Senate version isn’t as well crafted as the Making Work Pay Tax Credit established by the Obama Administration. [TaxVox] For example, some of those aforementioned hedge fund managers could find tax relief under the terms of the Senate measure.
If we want “job crushing,” then we let the current tax credits expire.
“Macroeconomic Advisers has estimated that the expiration of the tax cuts could reduce GDP growth by a half a percentage point and cost the economy 400,000 jobs by the fourth quarter of 2012. And dollar for dollar, keeping the temporary payroll tax cut into 2012 would boost the economy more than other tax cuts, like making the Bush tax cuts permanent or cutting the corporate tax rate, as Mark Zandi, chief economist at Moody’s Analytics, has shown.” [USN]
What Zandi’s analysis (pdf) reveals is that for every dollar ‘saved’ in the payroll tax holiday for average American workers there’s a $1.29 boost to our consumer based economy.
Bang for the Buck
If we follow the classical economic theory which says that both supply and demand are important, and if we believe that for a small business to be profitable it must have costumers, then the following policies will help stimulate demand:
A temporary increase in Food Stamps of $1.00 generates $1.73 in the economy. Extending unemployment insurance benefits by $1.00 generates $1.64. Increasing infrastructure spending by $1.00 generates $1.59. Increasing general aid to states by $1.00 yields $1.36 for the economy. As mentioned above, the payroll tax holiday generates $1.29. [Zandi, pdf]
Senator Jon Kyl (R-AZ) added his riff to the Boehner argument: “…the holiday has been a failure. “The payroll tax holiday has not stimulated job creation. We don’t think that is a good way to do it,” he said, arguing that taxing the richest Americans means taxing America’s job providers.” [USN] We need to recall at this point that the original stimulus bill (ARRA) contained $288 billion in tax cuts.
Senator Kyl is taking an unusual stance for a Republican politician in claiming that the ARRA cuts have not stimulated “job creation.” The mantra “No New Taxes” is a hallmark of GOP campaigns. And, $5 billion in ARRA tax cuts were associated with the provision that allowed corporations to “speed up depreciation.” The depreciation allowance, if Zandi’s analysis is to be credited, actually cost the economy, returning only 0.29 for every dollar. Putting these two elements together we find a GOP politician arguing in favor of a counter-stimulative tax reduction, and arguing against a stimulative reduction for most Americans “who would like the government to leave more money in their pockets.” The House Republicans have a more traditional approach to “stimulating” the economy.
The House will be taking up at least three bills in the near future which address the typical GOP approach. H.R. 3010 requires Congressional review of all business regulations which might have an impact on small business (as they define it.) H.R. 3094 would further restrict the National Labor Relations Board. H.R. 527 would require federal agencies to reduce the costs associated with regulatory compliance. [Boehner] Evidently, the House Republicans are still assured that de-regulation is the way to stimulate economic growth. This assertion only works if one ignores reality:
“The general pattern has continued, covering regulations issued during Republican and Democratic administrations alike, according to OMB’s year-by-year estimates since 2000. In every year the benefits of newly issued regulations exceeded their costs. In fiscal 2010, for instance, the major regulations had combined benefits of $18.8 billion to $86.1 billion a year, significantly higher than the estimated costs of $6.5 billion to $12.5 billion a year. (OMB’s calculations are in 2001 dollars; the figures here are slightly different from the figures used in my March analysis, reflecting OMB revisions).” [EPI]
In the “Be Careful What You Wish For” Department, the de-regulatory bills presented by the Republican controlled House of Representatives could easily end up reinforcing the general pattern discovered by previous OMB research — with proof the benefits of the regulations exceeded the costs.
Not to put too fine a point to it, but we’ve seen how the de-regulation movie ended in the financial sector in 2008, and it wasn’t pretty.
There are reasons, not the least of which is the impact on the Social Security Trust Funds, to be concerned with the extension of the payroll tax holiday, but Pity The Poor 1% isn’t one of them, and de-regulating the hedge funds, and union-bashing, aren’t part of the solution either.