Is Obama's tax plan a 'job-killer'?

Conservatives say the tax plan will harm small businesses – the nation's top job creators. But Obama says only about 3 percent of such firms are affected, while others call the tax-hiring link 'simplistic.'

By , Staff writer

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    President Obama calls on Congress to pass a temporary, one-year extension of the Bush-era tax cuts for people who make less than $250,000 a year, during a statement in the East Room of the White House in Washington on Monday.
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If it became law, would President Obama’s proposal to repeal Bush-era income tax cuts for households making more than $250,000 a year actually reduce US job growth?

That question arises because it is presumptive GOP nominee Mitt Romney’s central criticism of the plan. Mr. Romney doubled down on this assertion at a campaign event Tuesday in Grand Junction, Colo., saying that higher taxes on “job creators and small businesses” are the last thing the struggling economy needs.

“That will kill jobs,” Romney said at the event.

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On one level this analysis reflects basic Keynesian economics, say some conservative economists. Repealing tax cuts is indistinguishable from raising taxes, whatever the income level of the affected taxpayers. And raising taxes takes money out of the economy that otherwise might get spent on food, clothes, cars, and so forth.

“Perhaps [Obama] is unaware that the economy is struggling and that no reputable economic research supports the idea that raising taxes is good policy,” writes Douglas Holtz-Eakin, former chief economic adviser to Sen. John McCain’s 2008 presidential campaign, in National Review's The Corner blog.

On another level, say conservatives, the proposal to increase taxes on wealthier individuals will disproportionately hurt the largest job creation machine in the US economy – small businesses. That is because about 4 million small businesses with employees – sole proprietorships, partnerships, and other so-called “flow-through” firms – report their income on individual tax returns, according to US Treasury figures.

Of these, about 1.2 million report income greater than the cutoff for Mr. Obama’s proposed tax increase: $250,000 for couples filing jointly or $200,000 for individuals. This small, relatively successfully group reports about $341 billion in income. That’s 91 percent of the money earned by all flow-through employer businesses, according to Curtis Dubay, senior tax policy analyst at the Heritage Foundation.

“A higher tax bill would deprive the most successful flow-though employer-businesses of resources they would otherwise plow back into their business,” writes Mr. Dubay in a new analysis of Obama’s plan. “These investments would allow them to compete for more business and create more jobs in the process.”

The Obama camp sees this issue differently. As Obama pointed out in his announcement, in terms of numbers his proposal would affect only about 3 percent of the nation’s small businesses.

And some of the businesses included in that 3 percent are small in name only, with revenues of up to $50 million, notes Washington Post fact checker Glenn Kessler.

Furthermore, “Romney’s assertion that taxes affect business hiring decisions is simplistic,” writes Mr. Kessler in an analysis of the response to Obama’s tax proposal.

Money used for business expenses, such as employee wages, is fully tax deductible, according to Kessler. In that context, raising the taxes of small business owners could even provide an incentive for them to hire more workers, as it would be one way of shielding income that otherwise might be taxed at a new, higher rate by Uncle Sam.

In any case, this argument is notional. Obama’s plan has no greater chance of enactment into law than does ex-GOP hopeful Newt Gingrich’s proposal for a colony on the moon. With the campaign for the general presidential election fully upon us, proposals to close the nation’s yawning deficit gap or deal with the possible expiration of Bush-era tax cuts may have to wait until after November – or even well after November.

“After the all-out election wars, the warring parties will need to lower their voices, reduce their aspirations and sweeten up their attitudes. The election may help them to understand that the electorate is not going to give either one of them single-party control of government,” writes former Rep. Bill Frenzel (R) of Minnesota, a guest scholar in economic studies at the Brookings Institution, Tuesday in an analysis of the politics of the nation’s fiscal problems.

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