Raising taxes makes no sense right now. But Democrats are trying anyway.
Raising taxes makes no sense right now. But Democrats are trying anyway.
I ncredibly, Senate Democrats have not given up trying to raise taxes on American employers and families — even this close to an election, even after the highest inflation in decades has set in, and even as many economists think we are teetering on the edge of a recession. Their target is Main Street, family-owned businesses who have been particularly hard-hit by labor shortages, supply-chain disruptions, and the rising cost of living they have no choice but to pass onto their customers.
Most of official Washington believed the congressional Democratic “Build Back Better (BBB)” effort died last December, when Senator Joe Manchin (D., W.Va.) declared on Fox News Sunday that he was pulling out of negotiations. Dead it stayed until very recently, when Senate majority leader Chuck Schumer (D., N.Y.) went back to him with an idea for a “Skinny BBB” or “BBB Lite.” Senator Manchin said this week that he wants to hold off on consideration of these tax increases until September, after more data on inflation, jobs, and economic growth has had a chance to come in.
The new bill — the last, best hope of the expiring congressional Democratic majority to pass tax and spending law under expedited “budget reconciliation” rules — would have three pieces: a prescription-drug price control enforced by a 95 percent drug excise tax to pay for a papering-over of the exorbitant cost of Obamacare premiums; a series of corporate tax hikes to pay for a miniature “Green New Deal”; and a small-business tax-rate hike which supposedly is earmarked to Medicare. Put it all together, and it’s $1.5 trillion of permanent tax increases and some spending cuts to pay for a permanent $500 billion of new spending increases and some small tax relief.
The math here is an attempt to give Manchin and maybe Senator Kyrsten Sinema (D., Ariz.) the cover of $2 in permanent deficit reduction/Medicare solvency for every $1 in new spending. Of course, very few believe Washington will save this extra money — there’s a reason that budgets have been in the red for almost all of the past 100 years. Congress spends every penny that comes in, and then some.
The small-business tax hike is the most economically destructive part of the mix. It would raise the top marginal income-tax rate on the most common forms of successful Main Street family businesses by nearly 4 percentage points. The top rate on Subchapter-S corporations and limited partnerships would rise from 37 percent to nearly 41 percent. When adding in state income taxes, the small-business sector will easily face marginal income-tax rates approaching or exceeding 50 percent — half of all profits on the margin. The top tax rate on small-business income hasn’t been that high in nearly four decades.
It’s unclear whether this tax-rate hike will be done using one tool (net investment income tax, or NIIT) or another (self-employed contributions act, or SECA), but the outcome is nearly identical: a four-percentage-point income-tax hike. If this tax increase takes the same form it did in the House version of BBB, it will impact Main Street family-business owners making as little as $400,000 per year ($500,000 if married). As has become common, it’s likely that Congress would not adjust those thresholds for inflation, so over time, this tax hike will fall on any reasonably successful business owner.
Raising taxes makes no sense right now. The economy hasn’t fully recovered from the Covid lockdowns, is wobbling on the edge of a recession, and is facing inflation shocks only Baby Boomers have prior adult memories of. Why on earth would Congress consider raising taxes on small businesses when we are grappling with $5.00 gasoline, 9 percent inflation, and monster grocery-store prices?
Meanwhile, tax revenues in 2022 are coming in at some of the highest levels we’ve seen this century (when properly expressed as a percentage of the economy), and veteran economist Dan Clifton points out that second-quarter tax revenues were the highest since the roaring 1990s. Even if the Tax Cuts and Jobs Act is made permanent, tax revenues will still end up at or above the 50-year average. If you’re concerned about deficits and debt (and you should be), it’s because Washington has a spending problem — not a taxing problem.
The good news is that Main Street American employers are fighting back. Nearly 200 businesses and their trade associations have signed a letter to the Congressional leadership, urging them to junk this small-business tax hike: “In the face of a possible recession, 40-year high inflation, unprecedented supply-chain challenges, and chronic labor shortages, raising taxes on small, individually, and family-owned businesses is the wrong approach and should be rejected.” No doubt the signers were influenced by a survey of small businesses by the National Federation of Independent Businesses, which recorded the lowest small-business optimism score in the nearly half-century they have been taking the pulse of business owners.
The key Democratic senators have their own history to deal with. Back in 2010, Manchin told West Virginians that “I don’t think during a time of recession you mess with any of the taxes or increase any taxes.” For her part, Senator Sinema killed a tax hike on S-corporations and partnerships earlier in BBB drafts, and the one they are considering now hits a much lower level of owner income.
As Dan Clifton said this week on former National Economic Council director Larry Kudlow’s new show on Fox Business Network:
Small business income has been flat for ten months. And their costs are going up 10 percent. So if you are gonna raise taxes, you are kicking the small businesses while they are down. This is a very terrible growth-killing tax increase that is being put on the table. And I’m not sure Sens. Manchin and Sinema truly understand what they are doing, because it is in complete violation of the principles they said they would judge this bill by.
Let’s hope that this round of budget brinkmanship falls apart like so many that preceded it this Congress. The alternative is bleak. As Senate Republican leader Mitch McConnell (R., Ky.) said this week, “Democrats have already picked the American people’s pockets once . . . and now their solution is to pick your pockets a second time. First with inflation . . . and now with tax hikes.”