False Assumptions About Capital Gains and Small Business Taxation

I. A Corrective Perspective on Small Business Taxation

While being interviewed on CBS News this week, President Barack Obama said that his biggest mistake as president has not been policy-related but not putting his policies into story-form. Television news has recognized the reality that people like a major news story put in the context of the impact on an individual or family situation: for example, a breaking story on the unemployment rate remaining at 8.2 percent will feature how a family with no one employed is struggling to survive.

Although I believe that much of Barack Obama’s failure in governance has been in his policies, he could use some focused and accurate story-telling in trying to sell his proposal on the Bush tax cuts.

President Obama makes note in his speeches that 97 percent of small business owners will not be affected by his proposal to eliminate the Bush tax cuts for individuals earning over $200,000 and households earning over $250,000. Using numbers instead of percentages might have more impact, because the comparative numbers might be in the range of a couple hundred thousand to over eight million. More importantly, Obama should single out maybe three small business owners who occupy distinctive niches in the small business structure and demonstrate that his taxation proposal would not increase their income taxes.

There is, however, another dimension to how the Obama taxation proposal will affect small business owners, which goes largely unmentioned: many in that affected three percent will receive tax increases too small to affect hiring and firing decisions. It is estimated, for example, that a small business owner with $500,000 in taxable income would have his or her taxes raised by $14,000 — not enough to cover the expense of one full-time employee, either hired or fired.

Opponents of the Obama plan on the Bush tax cuts and the Affordable Care Act (ACA) stress the point that either or would be devastating to small businesses. Besides the Obama tax plan having very limited effect on small businesses, owners with fewer than 50 employees are not affected by the ACA and those with over 50 employees can get subsidies to help in insuring their workers. If a single payer plan financed out of general revenue were enacted, there would be no issue of small business owners buying insurance for their employees.

What would be the relative impacts on an individual having $500,000 in taxable income ( line 38 on Form 1040) — omitting itemized filing? Under 2011 tax provisions the tax owed would be $141,547; under the Obama proposal on the Bush tax cuts, the tax owed would be $155,547 based on current information; and under my 16 – 60 percent tax rate structure, the tax owed would be $172,010. Note that if the taxed individual had a Cadillac health insurance plan costing $20,000 or more a year and was satisfied with the coverage under an enacted single payer plan, he or she could drop the Cadillac plan and have almost as much disposable income, even under the most costly taxation plan above.

Before leaving this treatment of small business taxation, President Obama is being deceptive when he talks of a tax cut for 98 percent of taxpayers by enactment of his proposal on the Bush tax cuts. Based on the most complete IRS data, 47 percent of U.S. households don’t pay any federal income tax; therefore, elimination of the Bush tax cuts for the middle-class, would affect only about half of all taxpayers.

Obama’s initial position in the 2008 presidential campaign was that he wanted to end or let expire all of the Bush tax cuts. He later began to emphasize ending them for only about the top two percent of taxpayers. He apparently doesn’t realize the contradiction in the two positions but is now in the camp of those who believe that letting a tax cut expire on its due date is a tax increase.

II. The Fantasy of Capital Gains and the Wealthy as Job Creators

What has been instrumental in driving the concentration of wealth at the top of U.S. society? Economist Joseph Stiglitz identifies capital gains as a major culprit: “Lowering the rates on capital gains, which is how the rich receive a large portion of their income, has given the wealthiest Americans close to a free ride.” 

A theory has been developed to support the idea of giving tax breaks to the rich and allowing the manipulation of the financial system — Stiglitz cites it as one of the major theoretical props of today’s accumulated wealth and income-earning inequality. The theory is called “marginal productivity,” which associates higher income with higher productivity and a greater contributiuon to society. “Trickle-down” was built on this kind of thinking. 

Today’s GOP insists that any extension of the Bush tax cuts must include the top two percent of taxpayers. The GOP’s contention is that the wealthiest Americans are the  prime job creators in U.S. society, even though we now have a 12-year-long refutation of the contention. The Bush tax cuts are highly skewed to the benefit of the most economically well-off and yet job growth was anemic during the two terms of George W., Bush. The Department of Labor recently calculated that during the Bush presidency, an average of 11,000 jobs were created each month. President Bill Clinton, who increased taxes, mainly by raising the top marginal tax rate, had a job creation record far exceeding that of Bush II.

Shifting our focus back to capital gains, they are now taxed at only 15 percent. If a low capital gains tax rate is conducive to job creation, that should have been evident during the presidency of George W. Bush. There is, however, a study by Bruce Bartlett, a former high official in the Reagan administration and the author of a book lambasting George W. Bush for greatly increasing the size of the federal workforce, which study tracked the historical interaction of the capital gains rate to job creation, and  found no relationship between the two.

Part of the misinformation campaign about capital gains is the contention that the fruits of any reduction in the taxation rate would be shared by a broad segment of the American population. Middle-class people who own stocks or bonds tend to stash them in tax-sheltered retirement accounts where the capital gains tax rate does not apply. Over the past 20 years, more than 80 percent of the capital gains income realized in the United States has gone to five percent of the people and about half has gone to the wealthiest 0.1 percent. 

Overall then, claims of devastating taxation effects on small businesses; the contention that tax cuts to the economically well-off result in major job creation; and claims that reducing the capital gains tax rate or eliminating it would lead to an explosion of new jobs, are either made out of ignorance or constitute a package of massive lies.

The next blog will deal with distorted information on taxation of corporations.

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