Q. In the next month, the Senate is expected to consider whether to prevent a number of tax increases that will occur on January 1, 2011, unless Congress acts to stop these tax increases. One of the increases the President is proposing is an increase of the tax rates for the top two tax brackets. Should Congress act to prevent these looming small business tax increases?
A. Definitely. With unemployment at 9.6 percent, Congress should not allow tax rates to increase to pay for Washington’s overspending. Congress should permanently prevent all of the tax hikes that are currently scheduled to occur on January 1, 2011, including those for the top two tax brackets. If this isn’t done, half of all flow-through business income will get hit with a tax increase, according to the non-partisan Joint Committee on Taxation. This is especially harmful to small businesses because most of them operate as flow-through entities, which are S corporations, limited liability companies, partnerships and sole proprietorships. These businesses are called flow-through entities because the income earned by the business flows through the business onto the business owner’s individual tax returns (the individual, not the business, is taxed).
The proposed tax increase would make the already terrible 9.6 percent unemployment rate even worse. Small businesses create 70 percent of the new jobs in America. There are more than 20 million jobs in these types of businesses that will get hit with tax increases on the top two brackets if Congress doesn’t act to prevent that from happening. The tax increases will cause small businesses to lay off some of their current employees and will prevent some of the new hiring that would have occurred at small businesses in the absence of these tax increases.
Q. President Obama proposes making the research and development tax credit permanent and allowing businesses to expense certain property purchases through the end of 2011. Do these tax proposals make up for the damage that would be done to small businesses if the top two tax rates are increased?
A. No. The President’s research and development and expensing proposals mainly benefit large corporations. The President’s two tax proposals are relatively small in terms of their effect on small businesses, when compared to the proposed rate hike on the top two brackets, which is a 17 to 24 percent increase of the marginal tax rate on half of all flow-through business income in the United States. Providing a small amount of tax relief to small businesses and hitting them with a very large tax increase is not a good deal for small businesses. It’s like giving small businesses a few peanuts and taking away their supper.
Q. So what should Congress do regarding small business taxes?
A. Congress should first do no harm and not raise taxes on small businesses. This would allow small business owners to keep more of their hard-earned money so they can hire new employees, continue to pay existing employees, and make new business investments that help our economy. Then, after Congress has made sure that small businesses’ taxes aren’t going up, Congress should look at ways to cut those taxes, so that small businesses can keep more of their own money and help spark economic growth, rather than simply send that money to Washington to spend.