Last week, Senate Democrats decided, at least for the moment, not to pursue the Obama administration’s plan to let the Bush tax cuts expire for those in the top tax brackets. Most Democrats supported the plan. Most, if not all, Republicans opposed it, arguing primarily that increasing taxes on the wealthiest Americans would be devastating to small businesses.
First of all, it’s true, as many articles on the topic point out, that most small businesses will not be affected if we let the tax cut expire for the top 2 percent of wage earners. That said, those businesses it does affect will be, by definition, the most successful small businesses and the ones most likely to be in a position to hire new employees.
That, it seems to me, suggests that we should proceed carefully. But there’s not a lot of nuance in most of the arguments you hear. “It’s a body blow to the small-business community,” Grover Norquist, president of the conservative advocacy group Americans for Tax Reform, told The Times. Senator Charles E. Grassley, Republican of Iowa, told The Times that failing to extend the tax cuts on the top brackets would quash many businesses just as they started to grow. “If you own a 100-worker metal fabrication plant, and your taxes go up 17 to 24 percent, you’ll likely stop hiring or lay off workers to compensate,” he said. “Small businesses create 70 percent of new jobs, so it’s disastrous for job creation to raise taxes on small businesses.”
Wow. That does sound serious. As a business owner who could be in a position to be affected by such a tax increase (I hope), I am particularly interested in this discussion. I have no more desire than anyone else to pay higher taxes — this is America, not Sherwood Forest — and I have no shortage of other concerns: weak consumer demand and lending restrictions, among them. I don’t want or need a “body blow.” Nor do I want to be “quashed.” But let’s do some math.
First of all, businesses that have the same profit are not necessarily in the same situation. Let’s look at three profitable businesses that each produce $800,000 in taxable income. Business A is a metal fabrication plant — the same example Senator Grassley used in The Times‘s story. If the top tiers of the Bush cuts expire, this company would pay about $26,000 more in taxes (according to calculations done with the Tax Policy Center’s tax calculator).
But consider this: if the company is growing, it probably will need to buy more equipment. With the section 179 tax allowance that was enhanced in the just-passed small-business jobs bill, the company would be able to depreciate the equipment immediately, instead of spreading out the deductions over seven years. This should more than make up for the $26,000. The company’s tax bill could very well go down. No body blow. No quash.
Company B is in the same situation — except that it’s not growing, which means it’s probably not replacing any machines. And that means its tax bill might in fact go up. Instead of making a net profit of about $542,000, its net profit will be about $517,000. No company would be happy about this $25,000 tax increase. But is it a body blow? Will the company be quashed? Will it fire some people out of anger (Democrats first, no doubt)?
Here’s the real question: If the company does choose to lay off people, who will do the work that will make the company another half million dollars or more next year? If these people weren’t contributing to the profits, why were they employed in the first place? Laying them off is a dramatic threat, but it doesn’t make any sense. Now, I do believe it’s reasonable to ask whether it’s smart or fair to make this company pay more taxes. That question is worthy of debate. But that is not the point of this post.
Company C is a retail or service business that needs to invest in receivables, training or inventory. It can’t take any section 179 deductions. It could use the $25,000 that it will now have to pay in higher taxes. But will the higher taxes slow it down? With a solid bottom line, it probably can get a credit line at a bank. The same Times article quotes a businessman who owns 29 Wendy’s restaurants that employ 1,000 people and have $42 million in revenue talking about the impact of the increase. “We wouldn’t have as much for capital, upgrades like paving the parking lots, new technology like cash registers, remodeling,” he told The Times.
I’m sure that is true, but that doesn’t necessarily mean he won’t manage to do those things anyway. I’m also sure he knows what he’s doing, and he certainly deserves a return the risk he takes every day and on his investment, which must be substantial. And keep in mind: he’s employing 1,000 people, for heaven’s sake. But he didn’t call the increased taxes a body blow or suggest he would be quashed. As a fellow business owner, I appreciate that he didn’t insult us by playing the sky-is-falling card.
The rhetoric on this subject has become counterproductive. It can’t be helping consumer confidence, and it’s certainly not creating any jobs. In what used to be a running joke on “The Simpsons,” whenever trouble arose, Reverend Lovejoy’s wife would shriek, “Won’t somebody please think of the children?!!!” The emerging counterpart to that cry in our real-life politics seems to be, “Won’t somebody please think of the small businesses!”
It’s kind of flattering. But high unemployment is a serious problem that deserves serious discussion and solutions — not a punch line whenever someone wants to complain about a tax increase. We need serious discussion about the fairness of the tax code, the true repercussions of raising taxes and the impact of government spending.
Jay Goltz owns five small businesses in Chicago.