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Congress’ Small Business Tax Schizophrenia

Posted By J.D. Foster, Ph.D. On July 2, 2010 @ 11:32 am In Economics | Comments Disabled

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An old saying applicable to dysfunctional organizations is that the right hand doesn’t know what the left hand is doing. The President and Congress have taken this approach to a whole new level. In seeking to strengthen small businesses to spur badly needed job creation, the left hand doesn’t know what the left hand is doing.

The Congress is being ushered out of Washington for its July 4 recess by a dismal jobs report from the Department of Labor. Despite every kind of budget-busting stimulus bill Congress can devise, beginning with the 2009 Obama whopper weighing in at a tidy $862 billion, the economy remains lethargic and may be slowing. Obama entered office with an unemployment rate of 7.7 percent that now stands at 9.5 percent, has remained above 9 percent for over a year, and is likely to remain above 9 percent well into 2011.

Naturally, Congress doesn’t want to face the voters over the recess having done nothing about the economy lately—other than threaten it with Obamacare, a misguided financial reform, and soaring national debt—and so the Congress tried to push through the “Small Business Lending Fund Act of 2010,” a relatively benign collection of tax relief baubles targeted at small businesses centered on a temporary incentive to encourage small businesses to invest. As Senate Finance Chair Max Baucus said, “When we help small businesses, we help Americans get back to work.” So far, so good.

On the other hand, President Obama wants to raise income tax rates on small businesses beginning in 2011, and Democrats in Congress signaled their agreement through their words [2] and through the Budget Resolution they enacted last year. They intend to let the top two income tax rates jump to 36 percent and 39.6 percent, respectively. These are the rates paid by successful, profitable small businesses—the kind most likely to hire new workers [3]. The left hand giveth; the left hand taketh away much more.

A Reckless Policy by Any Ideology

The U.S. economy is struggling. Other major economies around the world appear to be struggling, as well—Japan, Europe, maybe even China. Raising taxes at all under these conditions is reckless. As explained by the President’s own chief economic advisor, Christina Romer, in a paper released in the latest edition of the American Economic Review [4], “tax increases are highly contractionary.” She goes on to describe the effects as “strongly significant” and “highly robust.”

Raising taxes in general is “highly contractionary.” Raising tax rates on small businesses and investors would be “highly contractionary” on steroids. Any tax bill intended to spur small businesses and job creation should add real substance to its array of tax baubles by preventing these tax increases indefinitely.

With Obama’s focus on health care reform, one would think he’d be familiar with the medical dictum “First, do no harm.” Cutting tax rates would be a positive step, but on tax policy the first step should be to do no harm—hence the need to avoid tax hikes. But this dictum also applies to energy policy, as well. Obama should take his chokehold off the Gulf Coast economy by lifting the moratorium on deepwater exploration and drilling. Worldwide experience with deepwater drilling confirms that the BP oil disaster was a “black swan” in the truest sense. It is bad enough that the Gulf region’s economy has been gummed up with tar balls; Obama’s reactionary assault on the Gulf oil industry just adds injury to insult [5]. Unless risking the highest unemployment rate in the industrialized world is Obama’s policy goal, raising taxes and stifling energy exploration and production under the present circumstances is indefensible.


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2010/07/02/congress%e2%80%99-small-business-tax-schizophrenia/

URLs in this post:

[1] Image: http://www.foundry.org/wp-content/uploads/Small-Business-Tax.jpg

[2] through their words: http://www.politico.com/blogs/glennthrush/0109/Pelosi_urging_Obama_to_move_faster_on_taxcut_repeal.html?showall

[3] hire new workers: http://www.heritage.org/Research/Testimony/Small-Businesses-Face-Steep-Tax-Hikes-Unless-Congress-Acts-Soon

[4] American Economic Review: http://www.aeaweb.org/articles.php?doi=10.1257/aer.100.3.763

[5] adds injury to insult: http://www.heritage.org/Research/Reports/2010/06/The-Economic-Impact-of-an-Offshore-Drilling-Ban

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