Critical Thinking about the Tax Cut Proposal

While I eat lunch, I’ve been thinking a bit about Pres. Obama’s proposal to extend tax cuts for those making less than $250K a year, and more important, Mitt Romney’s reaction to it. Mitt’s reaction is that we need to extend the tax cuts as well for individuals and couples earning more than $250K a year. His reason? “Successful small businesses will see their taxes go up dramatically, and that will kill jobs”.

But will it?

This would only affect those small businesses that are still reporting their income on Schedule C. Other businesses would be filing Corporate Tax Returns, paying corporate tax rates. Further, if we’re talking mid-sized businesses, most of these have incorporated for liability purposes. So it only the real small businesses that are affected, and those don’t create that many jobs overall.

Further, let’s think about those businesses further. The tax would only increase on the profits from the business. Employees are on the expense side. So reducing the amount of profit (remember: we’re talking businesses with profits over $250K here) shouldn’t force employers to lay off. What causes employers to hire or lay off isn’t taxes, it is spending. If more people have more spending money (from the lower side of the tax cuts), business should still be the same.

So who really benefits from extending the upper-end tax cuts? Those who make large amounts of money from investing, not the small business owners.

ETA: Two related posts of interest:

• “Can small business save the economy?” (Los Angeles Times)
• “Here’s What’s Wrong With the Anti-Tax Movement” (Livejournal)