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Small businesses and taxes
Oct. 17th, 2008 10:53 amThe Republicans continually assert that increasing taxes on the upper tax bracket would hurt small businesses, reduce investment, and lose us jobs. This assertion has gone unchallenged. But it doesn't make sense to me.
Tax is on profits, not receipts. I file a Schedule C. Any investment I make in the business is deducted from my gross receipts before tax is calculated. The easiest way for me to reduce my taxes is to increase investment in my business. Therefore, increasing tax on the highest tax bracket is likely to increase, not decrease, business investment.
But wait -- if the business owner takes the profit, he's going to invest it, right? Well, no. Not in his business; if he did that it wouldn't be profit. And not in other small businesses, because the ma-and-pa businesses under discussion are not publicly traded.
And if he uses his profit to buy stock it doesn't contribute to business investment or productivity. "Huh?" you might say. But unless the stock is newly-released stock, the money paid for it doesn't go to the company. The money just churns back and forth as stock is traded, but nothing goes back to the original company.
Contrast that with what happens when a lower-income person is taxed less and has extra money. That person is much more likely to spend it on goods and services. This increases demand and directly stimulates the economy. If the money is not immediately spent, it is likely to go into the bank, where it is then available for local small-business loans - again, a greater stimulus than stock investment would be.
So increased taxes on high incomes does not hurt small businesses; on the contrary.
I ran this by some economists - not particularly liberal ones - who said my reasoning was essentially correct. I don't know why the Democrats aren't presenting it like this.
Tax is on profits, not receipts. I file a Schedule C. Any investment I make in the business is deducted from my gross receipts before tax is calculated. The easiest way for me to reduce my taxes is to increase investment in my business. Therefore, increasing tax on the highest tax bracket is likely to increase, not decrease, business investment.
But wait -- if the business owner takes the profit, he's going to invest it, right? Well, no. Not in his business; if he did that it wouldn't be profit. And not in other small businesses, because the ma-and-pa businesses under discussion are not publicly traded.
And if he uses his profit to buy stock it doesn't contribute to business investment or productivity. "Huh?" you might say. But unless the stock is newly-released stock, the money paid for it doesn't go to the company. The money just churns back and forth as stock is traded, but nothing goes back to the original company.
Contrast that with what happens when a lower-income person is taxed less and has extra money. That person is much more likely to spend it on goods and services. This increases demand and directly stimulates the economy. If the money is not immediately spent, it is likely to go into the bank, where it is then available for local small-business loans - again, a greater stimulus than stock investment would be.
So increased taxes on high incomes does not hurt small businesses; on the contrary.
I ran this by some economists - not particularly liberal ones - who said my reasoning was essentially correct. I don't know why the Democrats aren't presenting it like this.
