July 16, 2012

July 16, 2012 | Commentary on Taxmageddon, Fiscal Cliff

Obama's 'Taxmageddon' Hike Would Kill Job Growth

It's a $500 billion, one-year tax increase that threatens to land a punishing blow on the already weakened economy - and it's less than six months away.

"Taxmageddon" takes effect Jan. 1. Pressure has been mounting for months on Washington to do something to stop it and avoid the hit to the economy.

After a long silence on the issue, President Barack Obama finally entered the taxmageddon debate recently. But rather than back a plan to stop it in its entirety, he instead pushed for his long-sought tax increase plan to repeal the Bush tax cuts (the largest portion of taxmageddon) for "the rich." This misguided plan would fail to provide much protection for the economy because its tax increase would badly slow job creation, as 13 million Americans remain out of work.

Obama often argues his tax increase won't hurt job creation because 97% of small businesses wouldn't pay higher rates under his plan. A report from his own Treasury Department provides data that shows the president couldn't be more wrong.

The Treasury report separates traditional small businesses that employ workers from business income earned by individuals working on their own, or those performing side jobs. This distinction makes all the difference. These individuals make up the vast majority of the 97% of small businesses that Obama says would be exempt from his tax hike. However, they rarely hire workers.

You may be one of these people yourself, or you very likely know someone who classifies. They can range from a lawyer who hangs his shingle on his home to a computer technician repairing computers and other electronic devices after work for friends and acquaintances.

Once you separate out these business filers who don't hire workers, the devastating impact of Obama's tax increase becomes clear. According to the Treasury study, 1.2 million small businesses that employ workers would pay higher rates under his plan. Most important as it pertains to job creation, these businesses earn almost all - 91% - of the income earned by businesses that employ workers and pay their taxes through the individual income tax.

The businesses that earn almost all of the income are the most successful businesses with employees. That also means they are the businesses that create the most jobs.

By pinpointing his tax increase on incomes over $200,000, Obama has maximized the detrimental impact that it would have on job creation. A higher tax bill would deprive the most successful small business employers of resources they would otherwise plow back into their businesses. Such investments would allow them to compete for more business and create more jobs in the process.

Obama often states that his plan would raise taxes only on "the rich" to force them to pay their "fair share." But less job creation as a result of his tax increase would make it harder for unemployed Americans at all income levels to find new jobs. Those seeking new opportunities to fully realize their potential, meanwhile, would find it harder to find more rewarding positions. Those diminished opportunities would be anything but fair to most Americans.

Momentum is building in Washington to stop all of taxmageddon. The House of Representatives will vote soon to do just that. The president has belatedly joined the debate with his tax-hike-on-the-rich plan. The question becomes, if Obama is going to hinder plans to stop taxmageddon's devastating impact on the economy, wouldn't it be better if he just remained on the sidelines?

Curtis Dubay is a senior policy analyst at The Heritage Foundation, where he specializes in tax issues.

About the Author

Curtis S. Dubay Research Fellow, Tax and Economic Policy
Thomas A. Roe Institute for Economic Policy Studies

First appeared in The Milwaukee Journal Sentinel