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Strange but True: Taxmageddon Will Help Level the Playing Field for Small Businesses

Research & Commentary
November 28, 2012

by Salvatore Babones

Corporations, small businesses, and ordinary Americans all face tax increases at the beginning of 2013. Time is running out to avoid this so-called “Taxmageddon” scenario. Some say it already has run out.

Tax changes scheduled for January include the expiration of the 2001 and 2003 Bush tax cuts, the reversal of the 2-point reduction in Social Security taxes that applied in 2011 and 2012, and the restoration of the estate (inheritance) tax to its historical rate of 55% on estates over $1 million.

In reality, Taxmageddon isn’t so much a tax increase as a return to 1990s levels of taxation. Old folks (that is, anyone over 40) might remember the 1990s as the last time America experienced anything like prosperity.

In fact, the last four times the economy grew by 4 percent were the four years before the Bush tax cuts.

Will Taxmageddon hurt the economy, or will it bring back those golden years? House Speaker John Boehner believes that raising taxes will harm small businesses. “We’re not raising taxes on small-business people,” Boehner stated categorically in a November 5 Politico interview.

The Social Security taxes rising from 4.2 percent to 6.2 percent are those paid by workers, not by their employers. And estate taxes — what opponents like to call “death taxes” — by definition only affect people who die.

That leaves the expiration of the Bush tax cuts. Together the 2001 and 2003 tax cuts reduced the top income tax rate from 39.6 percent to 35 percent. Under current law, the top rate will go back up to 39.6 percent in January.

The 39.6 percent rate is a marginal tax rate. It only applies to income over $398,350. The first $398,350 of income earned by a person — or a small business — is taxed at lower rates.

Any small business that makes a profit of over $398,350 a year is a pretty profitable small business. And only profits over $398,350 a year are taxed at the top 39.6 percent rate.

[pullquote]For a small business, a tax is a cost like any other. It’s important to keep costs down. But it’s even more important to keep costs lower than your competitors.[/pullquote]

Most small businesses are not hugely successful, highly profitable businesses that make profits of more than $398,350 a year. Most small businesses are struggling to get to that level.

For those struggling small businesses, Taxmageddon is a Godsend.

For a small business, a tax is a cost like any other. It’s important to keep costs down. But it’s even more important to keep costs lower than your competitors.

Big businesses are usually able to get bulk discounts. Taxmageddon is like a bulk surcharge. Small businesses will benefit.  Big businesses will lose out.

The smallest small businesses will benefit the most. The expiration of the Bush tax cuts will reduce the resources of their most profitable competitors. This will give them more space to thrive and grow.

No one wants to pay taxes, least of all small businesspeople. But someone has to pay for the services that government provides.

Good tax policy places the heaviest burdens on those who are making the biggest profits. Clearly, the system is working for them. If it didn’t, they wouldn’t have to worry about getting caught in that $398,350 top tax bracket.

For individual wage-earners, any tax increase makes life tougher. But for small businesses, taxes aren’t just a cost. They’re an important part of the competitive environment.

Higher taxes on the most profitable businesses help less profitable businesses compete. That won’t level the playing field, but it’ll make it a little less tilted. And when you’re not making $398,350 a year, every little bit helps.

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