According to IRS data, fully 48% of the net income of sole proprietorships, partnerships, and S corporations reported on tax returns went to households with incomes above $200,000 in 2007. That’s the number to look at, not the 3%. Would Mrs. Pelosi and Mr. Biden deny that the more successful firms owned by individuals in the top income-tax bracket are disproportionately responsible for investment and job creation?
It’s clear that business income for large and small firms will be hit by the higher tax rates. And in point of fact, firms of all sizes contribute to the nation’s prosperity. So it’s a mistake to focus only on the impact of increased tax rates on small business. But will the higher rates actually cause a significant reduction in business activity?
Economic research supports a large impact. A pair of papers by economists Robert Carroll, Douglas Holtz-Eakin, Harvey Rosen and Mark Rider that were published in 1998 and 2000 by the National Bureau of Economic Research analyzed tax return data and uncovered high responsiveness of sole proprietors’ business activity to tax rates. Their estimates imply that increasing the top rate to 40.8% from 35% (an official rate of 39.6% plus another 1.2 percentage points from the restoration of a stealth provision that phases out deductions), as in Mr. Obama’s plan, would reduce gross receipts by more than 7% for sole proprietors subject to the higher rate.
These results imply a similar effect on proprietors’ investment expenditures. A paper published by R. Glenn Hubbard of Columbia University and William M. Gentry of Williams College in the American Economic Review in 2000 also found that increasing progressivity of the tax code discourages entrepreneurs from starting new businesses.
In a recession, businesses suffer from a decrease in sales. What is the businesses’ next worry?
When the National Federation of Independent Business asked small business owners in June to list the most important problem they faced, 20% named taxes, making that the second most cited concern after weak sales. The expectation of tax increases, such as those in Mr. Obama’s plan, is on the minds of the people who should be leading the recovery.
The Obama administration talks about the deficit, but they forget the deficit is caused by their outrageous spending.
Until the Dems in the White House and in both houses of Congress (which they control) figure that one out, the economy will continue to tank.
The Audacity of Failure
[Former chair of Obama’s Economic Advisors Christina]Romer first admits that her magic Keynesian formulas were completely useless in predicting how bad the recession would be, and then she turns right around and uses those exact same formulas to justify the success of the stimulus. If that bootstrapping weren’t audacious enough, Romer then went on to claim that “the United States still faces a substantial shortfall of aggregate demand” and that “structural changes in the composition of our output or a mismatch between worker skills and jobs” having nothing to do with continued high unemployment. So instead of changing course, Romer wants us to double down with a second round of economic stimulus.How much more stimulus does the Obama administration want to spend? Romer wouldn’t say, and the White House is desperate to avoid calling any new action “stimulus,” but The Atlantic’s Megan McArdle has crunched the numbers and come up with a ballpark size of how big the original economic stimulus package would have to have been if we take the left’s Keynesian economics as gospel: “Full employment is perhaps 4.5-5%. If we assume that stimulus benefits increase linearly, that means we would have needed a stimulus of, on the low end, $2.5 trillion. On the high end, it would have been in the $4-5 trillion range.”
Even the Obama administration doesn’t want to add another $5 trillion to our $13.5 trillion national debt. That is why the Obama administration is pushing a $921 billion tax hike set to take effect on January 1, 2011. There is only one word for proposing $981 billion in taxes to pay for trillions in failed stimulus spending in the midst of 9.6% unemployment: audacity.