Tax Hikes and the Small Business Job Machine

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The Wall Street Journal
By: John Engler & Jerry Howard
November 17, 2010

The president says only the rich will be hit with the highest rates. Nonsense.

Speaking at his first cabinet meeting after the midterm election, President Obama repeated his familiar call for extending the current tax rates for middle-class families. He also vowed to support business. "We've got to provide businesses some certainty about what their tax landscape is going to look like, and we've got to provide families certainty," he said. "That's critical to maintain our recovery."

If Mr. Obama wants to help families, businesses and the recovery, then his course of action is clear: He should support the full extension of the 2001 and 2003 personal income tax rates that are now set to expire at the end of this year.

The reason is plain: A majority of the small businesses that belong to the National Association of Manufacturers (NAM) and the National Association of Home Builders (NAHB) pay their federal taxes at individual income tax rates--and the top rate is scheduled to rise to 39.6% from 35% on Jan. 1.

The threat of higher taxes in 2011 has created a profound sense of economic uncertainty among our smaller member companies, inhibiting investment and hiring. In a March RSM McGladrey survey of the NAM's smaller member companies, 82% said they were concerned by the expiring tax rates; 62% were "very concerned."

Unfortunately, the president still publicly favors extending the present rates only for single taxpayers earning below $200,000 and joint filers earning less than $250,000. The upper-income earners who would get hit with higher rates include manufacturers, home builders and other business owners--in short, the job creators. Their businesses are organized under the U.S. tax code as S Corporations or other "pass-through" entities such as partnerships, and they pay federal business taxes at individual tax rates.

For them, allowing the 2001 and 2003 tax rates to expire represents a tax hike--one that will hit their businesses as the pace of the manufacturing recovery is slowing and the housing market is still struggling to recover. Facing the possibility of higher taxes and less revenue, these small businesses will be forced to make difficult decisions about what to cut: jobs? salaries? benefits? capital expenditures?

When manufacturers and home builders are forced into making these decisions, the economic recovery will suffer. Since 2007, small and medium-sized manufacturers--which still employ more than nine million workers--already have lost more than 850,000 jobs.

Among home builders, only now is a sense of optimism cautiously taking hold after the depths of the housing crisis. During the Great Recession, 1.4 million jobs were lost in the residential construction sector (40% of the total), and housing starts dropped more than 70% from the 2005 high point of 2.2 million. While home construction nationwide is expected to grow next year, NAHB does not project housing starts returning to normal levels until 2013.

Administration officials have claimed that the higher tax rates will affect only a tiny percentage of small businesses. As representatives of a significant portion of our nation's small business community, we have to say that nothing could be further from the truth.

Manufacturers and home builders are capital-intensive, buy vast amounts of goods and services, and create products and construction that are the foundation for further economic growth. For example, construction of one single- family home generates three full-time jobs, nearly $150,000 in wage income, $85,000 in business income, and almost $90,000 in federal, state and local tax revenue.

In Seattle on Aug. 17, Mr. Obama called small business "the backbone of our economy and the cornerstones of our communities." We of course agree, and ask the logical question: If the president believes it helps the economy to cut taxes on small business, then why is he planning to do just the opposite?

Mr. Engler is president and CEO of the National Association of Manufacturers. Mr. Howard is president and CEO of the National Association of Home Builders.

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This page contains a single entry by CFED published on November 18, 2010 4:10 PM.

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