GOP Response: They’re Going to Have to Try Harder

Here’s the Republican plan, as articulated (badly) by Gov. Piyush “Bobby” Jindal:

• create jobs by lowering income tax rates for working families;
• cutting taxes for small businesses;
• strengthening incentives for businesses to invest in new equipment and hire new workers;
• stabilizing home values by creating a new tax credit for home-buyers

The Republican evaluation of these plans is that they “would cost less and create more jobs.” I assume the less and more adjectives refer to the Democratic plan. Here is what the American Recovery and Reinvestment Act does, viz a viz the above Republican bullet points:

• A refundable tax credit of up to $400 per individual and $800 for couples in 2009 and 2010. It is calculated at a rate of 6.2 percent of earned income and is phased out for individuals with adjusted incomes over $75,000 and couples with incomes over $150,000. How does this not lower tax rates for working families?
• Small businesses with gross receipts of up to $15 million can write off 2008 losses against five previous tax years. Current laws allows a two-year carryback of losses. How does this not cut taxes for small businesses?
• An $8,000 tax credit for first-time home buyers for homes purchased between Jan. 1 and Dec. 1, 2009. The tax credit phases out for individuals earning more than $75,000 and couples earning more than $150,000. How is this not a new tax credit for home-buyers?

So, what’s the difference? Republicans want to cut taxes and decrease spending. We’ve seen that before in recessions, and the results weren’t good. Sure, Gov. Jindal and the Republicans believe that “empowering you” is the best way to stop this recession. But what if you don’t have any money? That was precisely the problem that led to the Great Depression, and as noted in the link above, the government’s reaction — to increase taxes and decrease spending — made the problem worse. When no one wants to buy anything, it’s hard to “empower” the consumer to spend money. This is why, in a time of recession, the government intentionally incurs debt in order to increase aggregate demand. Then — and this is the part that Republicans either willfully or negligently don’t mention — when the economy recovers, the government increases taxes and cuts spending in order to pay itself back!

On the Issue of “Small Businesses”

Republicans are fond of conflating individual income taxes and “small business taxes.” There is no such thing as a “small business tax.” The owner of a small business pays himself as an employee, and he pays the marginal tax rate for the salary he pays himself. Concurrently, the small business (which is a corporation if it is incorporated, which it probably is) pays the marginal tax rate for its amount of taxable income. The top corporate tax rate is 38%, which is for taxable income between $15,000,000 and $18,333,333. According to an IRS report from 2005 (the most recent date that the report was issued), 6,082,975 returns were filed for corporations in 2005 (this is adding the number of forms 1120 and 1120S that were filed for 2005, which are by far the most common types of corporate tax forms filed). Of these six million or so returns, 5,475 were for corporations with net income of greater than $15,000,000. That’s 0.09% of corporations. So, when Republicans talk about corporate taxes “hurting” “small businesses,” that’s a lie. The largest single category of business size (as defined by net income) is the “under $25,000″ range.

According to the Small Business Administration, in 2006 (the most recent date that comprehensive figures were available), there were 17,403,814 “firms” in the United States, of which 10,755,262 (62%) have 20 or fewer employees. I think we can agree that the majority of businesses are small by sheer number of employees; this is a purely qualitative evaluation, however, as there are no technical definitions of “small.” This figure does not include nonemployer firms (see below).

Now, if you qualify as self-employed, you pay a flat rate of 15.3%. This rate takes into account the fact that, as a person who is self-employed, your normal payroll taxes — specifically, Social Security and Medicare — don’t happen like they do for people who get a regular payroll check. Also note that only the first $102,000 of self-employment income is subject to the 12.4% Social Security component of the self-employment tax.

The term “small business,” much like the term “partial-birth abortion” and “death tax,” is a public relations phrase, not a legal one. The U.S. Census Bureau, the Internal Revenue Service, and the Small Business Administration (oddly enough) all use the term “employer firm” or “nonemployer firm.” SBA defines a nonemployer firm as “one that has no paid employees, has annual business receipts of $1,000 or more ($1 or more in the construction industries), and is subject to federal income taxes.” There is a larger quantity of nonemployer firms, but there is a far greater amount of revenue from employer firms.

So, in summation, “small business owners” fall into the “working class” tax brackets that get tax cuts, anyway, so they will necessarily get tax relief. Businesses that don’t make a whole lot of money — and that’s the vast majority of them — do get tax breaks. And, in case farms enter the discussion, these numbers don’t include farms. Farms are taxed and regulated differently from every other business.

Republicans like to play up the notion that “Joe the Plumber” would be hurt by Democratic tax policies. In truth, Joe would get a tax cut, and the “small business” that he works for would probably get a tax cut, as well. I doubt, though, that “facts” will stop them from trying.