@Cycloptichorn,
In a post above Cyclo offered this as "proof" that the forthcoming increase in the income tax rates for the top tiers of the tax structure will have no adverse effect. His proof involves out-of-context and misleading statistics. It proves nothing.
Cycloptichorn wrote:
One of the talking points that Republicans like to throw around regards 'small businesses.' And the proposition that hiking up the top marginal tax brackets will somehow devastate them and their ability to create jobs.
Turns out that the truth is: not so many small businesses would be affected:
Keep this in mind next time you see someone yammering about how small businesses just NEED lower taxes to survive....
Cycloptichorn
Cyclo has used the statistic above as “proof” that higher top tax rates will not affect the great majority of small business owners, and therefore reinforcing his argument that the forthcoming end of the Bush tax cuts will not have a negative effect on our economic recovery.
The fact is the statistic above doesn’t prove anything at all. Indeed it doesn’t even tell us anything about the tax liabilities of the owners of the small businesses in the data set he references. The reason for this is that a very large fraction of such small businesses comprise only a part of the income of their owners and their incomes are taxed at a rate corresponding to their total incomes. For many, the small business is a marginal avocation used to supplement their incomes, and the business in taxed at the higher rate associated with the combined income.
My wife has run such a business, in her case as an interior designer. It started in an offhand way, after we had moved from city to city and house to house, as she helped a friend with the managing repairs & redesign for a recently purchased house. Gradually through an informal process it became a business: my wife found she was very good at it and soon developed a spreading network of sources for specialty goods, artisans, upholsterers, faux painters, tile setters and the like. Over the years she has done homes from Williamsburg, to Potomac MD, Manhattan, Chicago, Las Vegas and San Francisco. Her business generally grossed a few hundred thousand a year, and she provided a regular source of revenue for her suppliers and artisans. She enjoys the incidental travel to Europe and Asia in search of sources and made a net profit (no salary) of about 8% of the gross. Never has her business income reached the level of the top tax rate: she qualifies among the 98+% of small businesses that Cyclo cited. However, every dollar that she made was taxed at a higher marginal tax rate by both State and Federal governments in filings that included all sources of our income. The forthcoming tax increases will wipe out nearly all of the profit in her business, and that indeed is a significant disincentive. I believe this describes the situation behind a very large component of the data Cyclo so blandly cited.
Far more importantly, Cyclo’s data ignores a much larger component of our economy, businesses large and small, organized as partnerships or S corporations. Your doctor & dentist; the guy you call to repair your heating or air conditioning system; house painters; many of the stores at which you shop are almost all organized in such a way. A large fraction of high tech start up companies is also organized as S corporations. Such companies and partnerships distribute all of their profits directly to their proprietors, who pay taxes on them at the individual tax rate. A very large fraction of these incomes are indeed taxed at the top rates, and increasing those taxes is indeed a powerful disincentive to investment in the growth of these businesses. This is the component of our economy that nurtures most new and growing businesses, and is the main source for new jobs. In these bad economic times with now chronic high unemployment, we should be very careful not to kill the goose that lays the golden eggs.
I’m not trying to argue that the Bush tax cuts should be extended – though I believe they should. Instead I am trying to point out the nonsense, half truths and occasional deliberate deceptions that are involved in the web citations that are so often used as “proof” of seriously flawed arguments.
I believe that, in general, once a government has produced the rule of law and a basic level of safety and economic/social mobility, increased government activity and the increased taxes that go with (all other factors being equal) will almost always contribute to a reduction in economic activity. I’m not saying that shouldn’t be done, but only noting the economic effect. In any particular situation, a host of other factors, ranging from the distribution of wealth, to the availability of resources, international trade balances, and labor mobility to public and private debt levels, laws protecting intellectual property and limitations on monopolies all affect economic trends.
More to the point, I believe there is a burden of proof on any of us who offers an opinion on the issue of the possible extension of the Bush tax cuts in the present situation (In this case Cyclo’s cut & paste proves nothing). Further, none of us can be certain beyond doubt of our predictions – it’s a complex matter and no economist that I know of has an infallible record for predicting the future.
The dialogue here appears to be based on the presumption that the forthcoming tax increases are “obviously” needed and beneficial and will have no adverse side effects on our economy or the now chronic high unemployment we face. Further anyone who questions this apparently revealed truth is obliged to back it up with extensive “proofs” while those who oppose are not. That is neither civil nor reasonable: it is nonsense.
