Mr. Romney’s claim during the first presidential debate that increasing the income tax rate for highly successful small business owners would result in job losses is nothing less than a scare tactic and a sham intended to benefit the “1%”.  And as a businessman, he knows it.

(Note:  Following the posting of this article I had several comments about the word Poppycock.  That was the term Harry Reid issued to Mitch McConnell who blamed Democrats for nothing getting done in the Senate this year – ref).

I listened in disbelief as Mr. Romney, a businessman, made claims that increasing the income tax rate on small business owners would result in lost jobs.  I write the following based on my experience in having founded, owned and managed (for over 10 years) a successful ‘small business’ during the 1990’s.  Those were the Clinton years where an additional 10% surtax (3.6% total) was applied to taxable income exceeding $250,000 – a tax rate that is vehemently opposed by today’s political right.

My company, typical of many small businesses, was structured as a sub-S, and was started over my garage based on a single contract with one client.  The business experienced 8 consecutive years of new business growth and became a multi-million dollar enterprise having, at one point, 50 employees in 5 states with dozens of domestic and international clients.  The firm won recognition from both our local and regional Chambers of Commerce.  I was a ‘job creator’, an unlikely member of the 1%, and was also one of the minority of small business owners during those years that was subjected to the Clinton surtax.  And, according to our benefits broker, the benefits provided to my employees placed us in the top 5% of all companies, regardless of size.  And what I can say with certainty is that the Clinton surtax on upper level income was completely irrelevant to hiring decisions.  A decision to increase workforce, permanent hires or temps, was based on projections of cash flow and strength of demand for goods and services, not whether profits were taxed at higher or lower rates.

What is important to understand is that Mr. Romney is talking about income tax rates to small business owners.  What has not been part of the discussion is that there is absolutely no tax paid on corporate income that is used for hiring activities, paying employee salaries/benefits, and in fact any other valid business expense (leases on equipment and space, supplies, amortization and depreciation, etc).  It’s tough to beat a zero percent tax rate on income used to hire and support employees.  And it is difficult to understand how taxing corporate profits would lead to loss of jobs if demand and cash flow projections are strong.

The pre-tax profits of a sub-S flow through the owner’s personal tax return and are thus subjected to personal income tax rates rather than the typically lower corporate tax rates.  And there is a reason for that.  Once tax is paid on the corporate profits, the owner can take distributions out of the business without further taxation (and can also sell the business without second taxation on those assets).  This is different from the way most larger corporations are structured, i.e., C-corps, where the corporation and the owner(s) are kept completely separate and distributions to the owners/shareholders are subjected to taxation.  And that’s where the rub comes in.  The highly successful small business owner should not have it both ways, i.e., having lower tax rates applied to business profits while being able to take tax free distributions out of the business.  If ever there was a racket.

And the successful small business owner benefits in ways other being able to take tax free distributions from the corporation.  By the time taxable corporate profits hit $250,000, the owner’s healthcare benefits can be paid for with pre-tax dollars as an expense to the corporation – tax free healthcare.  Lest someone construe what is being written here as an attack on the wealthy, or successful, I am one of those and believe that those of us who have been successful have an obligation to invest back into the system that allowed us to do well, rather than starving it through policies that concentrate income and wealth to a small sliver of our population.  A little redistribution creates healthy demand for goods and services in an economy that is in large part based on personal consumption.  I had no problem investing 3.6% of my upper level gains to support the driver of our economy – our broad middle class.   We all did well during the 1990’s.

The claim made here that the Clinton tax on upper level income was irrelevant to small business job growth is supported by both common sense and actual data.  Hiring employees, with the attendant increase in expense (salary/benefits/space/equipment) without offsetting income from increased demand for goods and services, would adversely affect corporate profits more than could be offset by a lower tax rate.   As an example, the Bush tax cuts on income above $250,000 amounted to 4.6%.  On a million dollars of taxable upper level income, the tax cut amounts to $46,000, not even enough to support the increased expense of but one typical employee marked up for benefits and payroll tax contribution.  And if there was not increased demand for goods and service to offset that expense, the owner would be adversely affecting corporate profits – however, that sum would make an for an enticing distribution to the owner(s).  Secondly, US corporations are already sitting on over $5 trillion in cash (ref) – so what is the benefit of further lowering tax rates if job growth is already deemed to be less than optimal with that amount of cash on the sidelines?  And, the strongest job creation our country has seen in recent times was during the Clinton years where upper level income was taxed at a higher rate and when small business boomed; in fact, job growth during supply-side/trickle down periods most often underperformed periods where progressive tax rates were in place (ref):

TOTAL NON-FARM PAYROLL CHANGES (* Millions)

 

It’s All Backwards

Tax cuts are a weak stimulus for job growth here at home for a simple reason.  One can not control what people and corporations will do with that money.  On the personal side the tax cuts can be split into savings, paying down existing debt, and some portion of it gets spent into the economy.  With multinational corporations it is already known that the benefits of the Bush tax cuts went abroad into high growth markets while job creation and business investment languished here at home (ref).  When tax cuts are given to the wealthy (who have high savings rates), those monies get invested where they will get the best return; and during the Bush years the best return came from high growth markets abroad.  The objective of a corporation is to be profitable, not to create jobs.  For a corporation to hire there must be pressure from increased demand for goods and services that would support the expense.

The most effective entity we have for creating jobs at home in the private sector during an economic downturn is, regrettably, being disenfranchised and demonized by the political right.  That entity is our government whose spending is and has been an integral part of our economy (ref).  If there is any doubt about the ability of our government to create private sector jobs, one need look no further than the defense industries. US taxpayer dollars support by far the world’s largest defense budget (ref) and create/support private sector jobs in multiple publicly-owned firms such as McDonnell Douglas, Boeing, Raytheon, General Dynamics, and many others.  Our government has been the entity we used to achieve national objectives that in turn stimulated our economy.  Our interstate highway system, that contributes to our economy, was built on taxation with the work being performed by the private sector.  The economic benefits from technological innovation we experienced from the Apollo moon mission, paid for with taxpayer dollars, are well documented.  That program supported 34,000 NASA employees as well as 375,000 employees of industrial and university contractors with a discounted rate of return of 33% on that investment (ref).

We will not pay down $15 trillion in debt, but we can reduce our debt as a fraction of  the economy just as we did in the post World War II era.  Rather than borrowing money to support unfunded tax cuts largely favoring the wealthiest of our citizens, why not incur debt that puts America back to work, increases our competitiveness, and contributes to our economic growth.  Such spending could include rebuilding our badly tattered infrastructure, investing in smart grid to optimize the electricity we produce, modernizing our school system through technology, diversifying our energy sources, etc.  And yet today we have Grover Norquist, whose intent is to “shrink [government] down to the size where we can drown it in the bathtub” (ref).

Regarding all the Republican rhetoric about our constitution (and I have taken the time to go back and read that document), there is a phrase in the Preamble that has not been part of the dialog: that we put a government in place “to promote the general welfare” (ref).  I support a government that assures our food to be safe, our drugs to be safe and effective, our water and air to be clean, our airliners to be safe for travel, etc.  Our history is replete with instances of where industry, left unchecked, operated with little concern for the general welfare.  No better example in recent times was the deregulation of the financial industry where even Mr. Greenspan, a leading proponent of deregulation, stated before Congress that he was in a state of “shocked disbelief” that corporations would behave contrary to their own, and shareholders, best interests (ref).  We put a government in place, in part, to promote our general welfare, and we look to that entity now to help us out of this economic downturn.

So, Mr. Romney, let’s stop this charade.  You know better.  What you advocate for is nothing less than another in a long line of policies intended to benefit the few at the expense of the many.  Income tax cuts to successful small business owners simply have not stimulated job creation, and raising taxes on upper level income has not resulted in increased unemployment.  Shame on you, and shame on our president for letting you get away with that before a national audience.