Revised and Updated February 3, 2009
The Democrats' effort to stimulate the economy (H.R. 1, the
American Recovery and Reinvestment Act of 2009) is full of special
earmarks for certain projects, industries, and interest groups. It
would attempt to create jobs by redistributing borrowed money to
those most likely to spend it and by spending vast sums on
infrastructure and various other projects.
Many of the tax provisions in H.R. 1 go to those who already pay
no income tax; therefore, these provisions are only a form of
redistribution or welfare spending. There is precious little in the
bill that would help small businesses, and there is no major
long-term tax cut in the bill. Dependable lower tax rates are the
only policy that allows businesses to plan ahead and invest in
expansion and hiring. The expansion of private business is the only
way to increase economic growth and create jobs.
However, government spending and redistribution is not the best
way to help the economy recover. In fact, redistributive policies
create "progressive " tax rates, which are known to reduce
entrepreneurial activity. Government spending on projects that can be
provided by the private sector is a drag on growth, because public
sector provision is consistently less efficient than the private
The best way to create long-term sustainable growth is through
private savings, spending, and investment. Tax cuts are a far
superior way to unleash the productive forces in the economy and
expand job growth.
The "American Option," introduced by Senator Jim DeMint (R-SC),
avoids the discredited Keynesian consumption-based stimulus and
instead follows the tried and true method of cutting taxes on
businesses. Not only does the Republican bill cut taxes for
corporations, but it also cuts taxes for small businesses.
Marginal effective tax rates are a good measure of the burden of
government on small businesses. The "American Option" would:
- Reduce marginal effective tax rates on small business from an
average of 17.1 percent to an average of 14.8 percent,
- Give about 250,000 small businesses with $500,000-$1 million in
aggregate gross income an average tax rate almost 10 percentage
points lower, and
- Provide more than 2 million successful small businesses with
lower tax rates.
The burden on small businesses would significantly drop under
the "American Option." This is in addition to the drop in corporate
rates and would be a huge boost for employment.
Guinevere Nell is Research Programmer
in the Center for Data Analysis at The Heritage Foundation.
William M. Gentry and R. Glenn Hubbard,
"'Success Taxes' Entrepreneurial Entry, and Innovation," NBER
Working Paper No. 10551, June 2004.