Who are the “job creators?”
As the congressional supercommittee begins its budget-cutting efforts, state and local governments are worried about looming cuts to their federal grants. From Bloomberg:
In statehouses across the U.S., a budget-cutting congressional supercommittee and the sputtering economy threaten a fledgling recovery from the worst fiscal crisis in more than 70 years.
To create a more balanced approach that includes revenue increases as well as spending cuts, President Obama has proposed to raise taxes on the highest earners by reducing their tax exclusions and deductions (of which the municipal bond tax exclusion is a relatively small part).
Much of the criticism about his proposal to raise taxes on the wealthiest Americans describes the proposal as a drag on those who own small businesses and create most of the nation’s employment. Republicans often describe these small businesses as “jobs creators” when they argue against tax increases. As House Budget Committee Chairman Paul Ryan (R-WI) said on Fox News Channel:
And don’t forget the fact that most small businesses file taxes as individuals. So, when you are raising these top tax rates, you’re raising taxes on these job creators where more than half of Americans get their jobs from in this country.
To see whether this rhetoric is accurate, I thought it would be helpful to look at the IRS data for small business owners who file S-corporation and small proprietorship tax returns. I got the idea after seeing this income table from Scott Shane:
There are weaknesses in Scott’s data because it is four years old and averages total revenues for an industry against the number of returns filed with the IRS. But it is a brilliant, quick-and-dirty probe of whether small business employers would be affected by a proposed tax increase that targets those who have personal income exceeding $200,000 a year.
Basically what you see are a few industries where the average small business owner, or “jobs creator,” would see a significant change under the president’s proposal. When I ran some rough numbers on 2008 IRS data I found that the average S-Corporation filer had revenues of $1,512,000 and earnings of $106,721. The only industry that far exceeded the average was the “securities and other financial investments” sector which had revenues of $1,569,000 and income of $491,000.
When I study the data a little more it appears that S corps that file the lowest returns tend to hire the greatest number of people. For example food services and retail trade are sectors that are far down the earnings scale but that also employ many workers.
When you look closely at what the president has proposed it doesn’t seem to be aimed at the majority of small-business owners whose earnings would fall below the threshold for a tax increase. Instead President Obama’s target seems to be those who have high income from investments and capital gains. And I’ve yet to see a strong argument that those earning their wealth from financial gains are job creators.