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  • Marcus Makes the Case for ... Lower Tax Rates on Small Businesses

    Ruth Marcus tried her best yesterday to undercut the argument that tax cuts hurt the economy’s main job creators — small businesses. But once you straighten out the curves of her case, you find a highway leading directly to the opposite conclusion. It turns out she actually reinforces the point that higher tax rates tend to hurt those small businesses most likely to hire.

    Marcus cites a handful of interesting papers to support her argument. The traditional lore about small-business job creation comes from David Birch’s 1979 book The Job Creation Process. It reported that small businesses created two-thirds of the net new jobs, or more. As the Small Business Administration notes in a retrospective on small-business advocacy, researchers in other countries “were reaching the same conclusions.” On a global basis, big businesses generate the headlines, while small businesses generate the jobs.

    A 2008 paper by the National Bureau of Economic Research confirmed that “small establishments create more jobs [than large establishments]” but found the difference to be smaller than previously thought. Further research will hone the results further, but the critical point is that even the research Marcus cites acknowledges that small businesses create the most jobs.

    Another NBER paper found that the age of the firm was the deciding factor. New firms start out with few employees and the “gazelles” among them grow rapidly. But as firms age, they tend to stabilize around a normal size and growth rate, on net.

    The clincher in Marcus’ argument: “The start-ups that need nurturing aren’t apt to be the ones hit by higher marginal tax rates.”

    That’s true for start-up firms. They typically generate losses initially, burning through capital until they establish themselves, their customer base, and their products. Those that fail wither or disappear.

    But Marcus somehow forgets what Paul Harvey called the “rest of the story.” Those startups that succeed are the gazelles, surging forward in investment and in taxable profits. Which go on to contribute to significant net job creation? Again, the gazelles. Which face the higher tax rates? You guessed it.

    Obama’s proposed higher tax rates won’t fall on every small business. But they will fall on any reasonably small business making a normal level of profit. Even for established companies, it’s a pretty small outfit that generates only $250,000 in annual profits.

    More importantly for getting the economy kick-started, those higher rates will fall on the gazelles, those small businesses ready and able to grow rapidly — if they have the incentives, and if they have the cash. Higher tax rates on the gazelles, those small businesses that really matter to job creation, weaken incentives and drain cashflow. Higher tax rates on the gazelles are a real kick in the teeth.

    Cross-posted at The Corner.

    Posted in Economics [slideshow_deploy]

    4 Responses to Marcus Makes the Case for ... Lower Tax Rates on Small Businesses

    1. Ken Jarvis - Las Veg says:

      Who is Ruth Marcus?

      Just another Obama Hater.

    2. spudmomof6 says:

      Most people don't realize that if a business makes a gross profit of a million dollars, has expenses of $750,000, and uses the remaining $250,000 to make the business grow (by expanding the facility, buying new equipment, etc.) the owner under certain filing methods must pay taxes on the entire $250,000 at income tax rates, not capital gains rates. This is true even if the owner doesn't take a penny out of the business for his/her own salary. Changing these provisions would cause business growth (and job creation) to skyrocket. The added tax burden plus the increased risk (note that one-man businesses like real estate, construction, etc. were not eligible for unemployment) makes owning a business a chance many can't afford to take.

    3. Jill, California says:

      Keep hammering home the point that raising taxes on the wealthy will cause a trickle-down effect on everyone else. The so-called wealthy will not absorb the higher taxes alone. They will pass those taxes on to the middle class by increasing the cost of goods and services wherever possible. Higher taxes for the wealthy means higher taxes for all Americans.

    4. George Colgrove, VA says:

      How about hammering the idea that we stop taxing businesses all together. Business taxes are simply passed on to consumers anyway. This would create instant and long lasting stimulus. Of course, this would need to be accompanied by significant decreases in the federal government. For every dollar "lost" to the government, the government should cut $2. The SEC would be the best place to start. The SEC has been instrumental in hurting business for decades. It should be brought under control.

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