NOVEMBER 19, 2012
House Speaker John Boehner, R.-Ohio, opposes President Obama’s plan to let the top marginal rate rise from 35 percent to 39.6 percent on family income above $250,000. He doesn’t oppose it because it would take a little more money away from rich people. Protecting the interests of rich people is not deemed socially acceptable, even among many Republicans. And Boehner doesn’t oppose it because it would hurt big business. Not even Grover Norquist (I think) imagines the Fortune 500 would be imperiled if the top marginal rate rose by 4.6 percentage points. No, Boehner opposes returning the top marginal rate to its level during the tech-booming Clinton years because it would hurt small businesses. Small businesses are famously the engine of job growth in America (though, because they’re unstable, they’re also a major job-destroyer, but never mind that). “Raising taxes on small businesses will kill jobs in America,” Boehner told USA Today. “It is as simple as that.”
There have always been a few problems with Boehner’s conceit that higher taxes on large incomes destroy small businesses. The biggest problem is that Obama’s $250,000 threshold excludes from higher taxes 97.5 percent of all small business owners.
Boehner said in a Nov. 9 press conference that “the problem with raising tax rates on the wealthiest Americans is that more than half of them are small business owners.” But even Boehner’s spokesman had to admit that wasn’t remotely close to being true. What Boehner meant to say, the spokesman told the Washington Post, was that more than half the income earned by small businesses would be subject to Obama’s proposed tax increase. But that isn’t really true, either. As the Center on Budget and Policy Priorities has pointed out, Boehner (or rather, his spokesman) is relying on a calculation that defines “small business” so broadly that it “includes any taxpayer who receives any income from any ‘pass-through’ entity (that is, an entity that does not pay corporate income tax on its profits but instead passes them through to its owners, who pay tax at the individual rates).” It includes paper constructs that are not, in fact, businesses; it includes passive investors; it includes people who receive a tiny share of their income from small businesses; and it includes S-Corporations, a type of tax dodge for companies that aren’t necessarily small. (For instance, the Tribune Co. is an S-corp.) S-Corporations are especially popular among very rich people. Of the 400 richest taxpayers in the U.S., as identified by the IRS, 237 are, by Boehner’s definition, “small businesses.” Because they receive royalty and investment income, respectively, President Obama and Mitt Romney also qualify, under Boehner's definition, as “small businesses.” So, in all likelihood, does my onetime New Republic colleague Charles Krauthammer, now a Goldwater-conservative Washington Post columnist and Fox News personality, who used this bogus statistic in a September column. I guarantee you that Charles will remain in business after his top marginal rate goes back up to 39.6 percent.
Very well, you say. That's what the experts think. What do small business owners think?
The answer is buried in a Nov. 19 Wall Street Journal story by Sudeep Reddy and Scott Thurm. The headline (“Investment Falls Off A Cliff”) is not, I'll grant you, auspicious for my argument. In reviewing corporate securities filings and conference calls, the Journal found that business investment in equipment, software, and new buildings declined during the third quarter of 2012, which ended Sept. 30. Exports slowed down, too. Unemployment would presumably have risen if businesses had boosted payrolls significantly after the recession ended in 2009. But they didn’t, so we haven’t seen mass layoffs. Not yet, anyway.
There are, however, a few bright spots. One is consumer confidence, which is rising. The housing market is improving a little bit, too. And oh, there’s one more bright spot. You’ll never guess where.
“The mood,” Reddy and Thurm write, “appears better among small businesses than large corporations. A survey by the National Federal of Independent Business in October found an uptick in capital spending among small businesses. While overall sentiment among small businesses remains below its prerecession average, it has been resilient in recent months.”
Whaa? Clearly these small business owners didn’t read the NFIB-sponsored study by Ernst and Young, much-cited by Boehner and, during the campaign, by Romney, alleging that looming tax changes on high incomes would reduce investment by 2.4 percent. Or perhaps they did read it but also read the fine print that said this would occur only over the “long run,” which, Glenn Kessler has pointed out in the Washington Post, turns out to be more than a decade, rendering the entire exercise pointless as a prediction of whether the current fragile recovery would be harmed. Or maybe they noticed that the Ernst and Young study was polluted by, among other things, the indiscriminate inclusion of S-Corporations. Or maybe, like Romney and many other conservatives afflicted by the disease of epistemic closure, they believed that polls and Nate Silver lie and that Romney was fated to win the election, so there was really no need to worry that taxes would rise, because Romney would never let that happen.
Or maybe these small business owners do not, in fact, actually care whether the top marginal rate rises incrementally to 39.6 percent. They don’t even seem particularly worried about the fiscal cliff, which (according to the Journal) is what has the rest of the business community pulling back from investment. Everybody agrees the fiscal cliff would have some significant negative effect on economic recovery if it continued long past Jan. 1 (which it surely wouldn’t). But that’s not a story about the top marginal tax rate. It’s a story about the GOP’s bizarre reluctance to raise the top marginal tax rate as part of a deal to avert the fiscal cliff. They’re doing it for the little guys! And whaddya know, the little guys aren’t acting the least bit grateful.