Today, I joined 87 other economists in warning that raising taxes on small businesses — specifically, raising the top two tax brackets to their pre-2001 levels — would have a detrimental impact on the economy. Sadly in some circles, tax policy is viewed as a strictly political issue. In fact, it is a foremost economic policy issue — particularly when it is part of the $600 billion fiscal cliff.
As I noted elsewhere, raising these tax rates would be folly. Research shows that doing so has striking impacts on the activities of entrepreneurs and small businesses that are taxed as so-called “pass-through” entities — lowering their propensity to hire and invest. “Pass-through” entities account for 86 percent of our entire economy. At a time when job growth struggles to crack the 100,000 barrier monthly, the proposed tax increases would be quite damaging.
Moreover, it would be better to follow the lead of the Bowles-Simpson Commission, the Rivlin-Domenici Commission, and others and reform the tax system to have lower rates and a broader base. Real reform would have dramatic benefits, especially for small businesses — lowering the top rate to 28 percent would dramatically enhance small business hiring, investment, and growth.
This research also shows who benefits from tax reform and who ultimately pays for tax increases. When tax reform that is in principle directed at higher-income taxpayers increases hiring and payrolls, it in fact benefits workers. Tax increases do the opposite, and lower-income workers will bear the burden.
Extending current tax policy now and working toward pro-growth reforms is the most sensible path forward in our current economy. We agree.