Higher Taxes jeopardize New Jobs

Small-business people, hardest hit by new taxes, say they will create fewer jobs

WITH national unemployment stuck at around 7 percent, the defense industry still shrinking, and layoffs continuing at Fortune 500 giants such as Procter & Gamble and IBM, the nation could use a job-creating boost from small business.

But many economists and small-business people say the president's economic package - now in the final stages of House-Senate negotiation - will have the opposite effect.

To reduce the federal budget deficit and to make the rich "pay their fair share" of taxes, the Clinton budget places a huge burden on the sector that has created all the net new jobs in the economy in recent years - firms with 500 or fewer employees.

"We're what creates the taxes and the job base ... for the government to work," says Greg Tisdel, president of a small company near Seattle that makes doors and window frames. "All this does is make us hire one less person," he says of new taxes coming at the federal, state, and local levels.

To compensate, Mr. Tisdel says his company is reducing the number of phone lines and dropping newsletters. Moreover, "the people that make me successful, my employees, don't get raises."

On Tuesday, Citizens for a Sound Economy, a lobbying organization, released a survey showing similar views among small- business owners nationwide. Forty percent of those polled said they are likely to lay off employees if the new federal taxes are imposed. Equally disturbing "is the number of jobs that will never materialize," says Jim Miller, the group's chairman and a former budget director under President Reagan.

David Hale, chief economist with Kemper Financial Services Inc. in Chicago, calls the Clinton budget "hostile to growth."

The vast majority of businesses - firms organized as partnerships, proprietorships, or "sub-chapter S" corporations - pay taxes as individuals, not corporations. Those with income of $250,000 or more will see tax rates jump from 28 percent to nearly 45 percent over four years.

Mr. Hale says the planned $115-billion hike in personal income taxes represents "the largest increase in marginal income-tax rates since the 1930s," weighing down "both successful entrepreneurs and investors willing to finance small firms." Moreover, he predicts wealthy Americans will shelter more money from taxes. This would at least partially thwart the aims of deficit reduction and increased tax "fairness."

The tide of criticism comes as the White House is trying to win support for a House-Senate compromise on the budget. A gas-tax increase and new social spending remain areas of sharp debate between liberal and conservative Democrats.

Clinton has been scrambling recently to cast his plan as a winner for small business. He touts the merits of the expensing provision, which will almost double the amount of equipment purchases small firms can write off, from the current limit of $10,000. The House version of his budget also includes nearly $1 billion in capital-gains tax cuts for investment in certain types of small firms.

These provisions are welcome to many small firms. But they are not enough to sway John Hansen, president of a wireless cable television company that employs 11 people in Spokane, Wash. He says the president's plan is a disincentive for business investment and he questions whether it will even succeed in cutting the deficit.

"Hopefully Clinton's plan will fall apart," he says.

The tax hikes, which include levies on gasoline and corporate income as well as on personal income, add up to uncertainty that is already a drag on business activity, economists say.

William Dunkelberg, chief economist for the National Federation of Independent Business, a small-firm trade association, says surveys of small businesses have shown a disturbing reversal of expectations regarding the economy since January. Hiring plans also worsened recently, although 14 percent of those surveyed still said they planned to add workers, versus 7 percent who planned to cut staff.

Mr. Dunkelberg notes that the average workweek is at an all-time high, indicating a pent-up demand for labor. But businesses are wary of hiring, not only because of the new taxes in the current budget talks, but also because of those that may come under Clinton's forthcoming health care reforms. The effort to expand health insurance could add between $50 billion and $150 billion in new taxes or costs for businesses and workers, he says.

"When future historians are asked to explain why the US economy performed so poorly during the early and mid-1990s," Hale says, high on their list will be "the failure of the Clinton administration to propose a bolder fiscal policy."

He suggests that the president should have used his political clout from last fall's election to shift the nation's tax structure toward taxes on consumption and away from income taxes that penalize savings and investment. America lags behind other industrial nations on this front.

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