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The Tax Debate and Small Businesses



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Tax Day is a good day to reflect on one’s own taxes. But it is equally important to think about the future of the tax code, because tax reform will be a pillar of any serious effort to solve the deficit problem, or create jobs. Indeed, it could be a make-or-break moment for small businesses taxed as pass-through entities.

As I argued, small businesses and entrepreneurs are especially sensitive to current and expected tax policy given that they must make important long-term decisions today on investment, hiring, and expansion. Accordingly, the highly uncertain outlook for U.S. tax policy has high stakes for their growth and survival.

What are the possible futures? The most immediate concerns are the looming expirations of the 2001 and 2003 tax laws. A sunset would hurt overall economic growth and harm small businesses directly, resulting in a loss of between 300,000 and 2.9 million jobs. The higher marginal tax rates come 2013 would reduce by roughly 18 percent the probability that a small business entrepreneur would add to payrolls and diminish the growth in payrolls by over 5 percent. The probability that a small business undertakes expansion falls by nearly 15 percent, and reduces the capital outlays of those that do by almost 20 percent.

One would think that with stakes that large, the nation’s leader would be at the forefront of efforts to extend current tax rates. Alas.

#more#Alternatively, the president could succeed in passing into law his proposals. This would also result in the damaging effects of higher marginal tax rates. However, they would also result in impaired incentives for saving and investment, reduced international competitiveness, and a more complex tax code. The prospect of this policy future hampers the current performance of the small business sector.

The final option on the table is contained in the House-passed budget resolution. Like the Simpson-Bowles commission proposals that the president kicked into the gutter, the House undertakes fundamental tax reform that would improve the climate for growth, expansion, hiring and investment by small businesses and entrepreneurs. That is, the reductions in marginal rates alone would raise the probability of new hires by nearly 20 percent, the size of payrolls by nearly 6 percent, the probability of a capital expansion by almost 20 percent. It also moves to an internationally competitive territorial tax system. Finally, it reduces the looming threat of large future tax increases by undertaking the entitlement reforms needed to keep spending under control.

Tax day is a useful reminder that there is an important debate over the future of tax policy, the incentives for entrepreneurial businesses, and the growth climate in the U.S.



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