Posted on Sun, Sep. 19, 2010
By now you've heard the argument that President Obama's plan to raise taxes on the wealthy would imperil the economic recovery by hurting many small businesses.
The claim is a whopping exaggeration of the likely impact of Obama's proposal to raise marginal tax rates on the highest earners.
Congress must decide by the end of this year whether to extend Bush-era tax cuts that are set to expire. Obama and his Democratic allies want to reinstate the tax cuts for individuals earning less than $200,000 or families under $250,000.
Republicans, and some Democrats, want to preserve the tax cuts for everyone regardless of income level.
Yet they also profess, with a straight face, to being worried sick about deficits. They can't have it both ways.
Opponents of Obama's plan argue that raising taxes on the wealthy would either force small businesses to lay off employees or prevent them from creating more jobs.
But IRS data show that only 3 percent of taxpayers who report any business income would pay the higher tax rates. The nonpartisan Tax Policy Center puts the figure closer to 8 percent - a level higher than most Democratic lawmakers are willing to concede because they want you to believe a tax on the wealthy will have virtually no negative impact.
Regardless, more than 90 percent of taxpayers with business income wouldn't be touched because their earnings fall below Obama's income threshold.
Further, some of the people who would pay higher taxes are not proprietors of a business - they're corporate executives and other wealthy investors who receive some passive business income.
Reporting income as an S-corporation or a partnership does not necessarily qualify a person as a "small-business owner." The total includes people who earn side income as consultants or, for example, receive income from real estate - but who aren't likely to have employees.
Raising taxes on the wealthiest 2 or 3 percent of taxpayers would have an impact on deficits, the subject of valid concern across the political spectrum. The cost to the government of extending tax cuts for families earning $250,000 or more would be $700 billion over 10 years
That sum would be financed by borrowing from foreign governments, and paid off in the decades ahead by our children and grandchildren. That course is irresponsible. In fact, when the economy rebounds sufficiently, Washington will need to revisit the question of raising tax rates on all income groups.
The Democrats' proposal to extend tax cuts for the middle class also comes at a considerable cost to the Treasury - $2.8 trillion over the next decade.
But extending tax cuts for the middle class is more justified by its impact on an anemic economic recovery. The middle class tends to spend more of the money it gets back from tax relief, stimulating job growth. The wealthiest taxpayers tend to save the additional money.
Congress probably won't act on tax cuts until after the November elections. But the best course is to preserve the lower rates for those who can least afford an increase.
