Tax Break

Congressional report: small business tax break impact “so small as to be incalculable”

April 20, 2012

In what our colleague Kim Dixon termed “an escalating election-year war of words over taxes” the Republican-controlled House of Representatives has passed a 20 percent tax break for small businesses, that will likely face the same fate as the Buffet tax Democratic senators voted for earlier in the week: death in the other party’s chamber.

Democrats opposed to the tax blasted it as favoring small businesses that are also tremendously profitable. Steven Dennis wrote in Roll Call that it looked like businesses like the New York Giants football team, which employs 210 people but is worth $1.3 billion, according to Forbes, could qualify for the tax break.

But former presidential advisor Bruce Bartlett, who worked in the first Bush administration and for Ronald Regan, argues with the deeper premise – the axiom that small businesses are the drivers of job creation.
He lays out the argument in a New York Times Economix post from earlier this week:

The linkage between a small business’s tax burden and job creation, however, is tenuous at best. This stands to reason, since business start-ups, the prime engines of small-business job creation, seldom have any profits to tax; most start-ups lose money for the first several years.

Indeed, the bill itself seems to offer very little promise of much impact at all, as passages from the macroeconomic impact analysis done by the Ways & Means Committee of the legislation below seem to verify. Bartlett highlighted this in an email to reporters April 17:

…the effects of the bill on economic activity are so small as to be incalculable within the context of a model of the aggregate economy.
The size of the tax reduction ($45.9 billion) is quite small relative to the size of the economy (0.003 percent of projected GDP in 2012), which means the stimulus effect will also be quite small. As the tax reduction expires, the stimulus effect also expires.
In addition, the bill provides an incentive to shift profits to the period when they are taxed at lower effective rates. Firms have an incentive to shift sales, and, if necessary, commensurate production and employment, into the period of the tax deduction.

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