Here's Why the Obama Tax Increase Makes No Sense

In his latest election ploy, president Obama is touting a tax increase for those earning over $200,000 ($250,000 for those married filing jointly). Of course, in typical fashion Obama calls the tax increase a tax cut since he does not raise taxes on the rest of us. The problem with the tax increase, however, is that it targets the biggest engine of job growth in the country: small business. Something like 70% of all new jobs in the USA are created by small businesses, and most of those small businesses pay income tax through the individual returns of their owners. For the successful small businesses (where most of the jobs are created), it is common for the business income to put the total on the owners' returns over $200,000. That does not make these folks rich; it means that their businesses are successful. Here is an example: think of a retail business that start out in one location. It is profitable and after a year or so, the owners decide to open at a second location. In order to open that second store, the owners need capital. They have to lease the premises and fix it up. They have to buy the inventory to stock the store. They have to run advertisements to let folks know that the new store is there. They have to cover the initial losses incurred until the sales reach the point where the store is profitable. Let's say that this total cost is $200,000. These days, most small businesses cannot get bank loans thanks to the Dodd Frank law that Obama and the Democrats passed in 2010. That means that the capital to open the business has to come entirely from the owners. That means that profits of the first store get plowed back into the business to open the second store. But all those profits first have to be taxed before they can be used for that second store. That's right, the "income" that made these folks "millionaires and billionaires" in Obama speak never went to them; it was just held so that the business could prosper and grow. Now Obama wants to take a big chunk of that money away in taxes on the "wealthy". The effect is clear; some of the small business expansion that would otherwise have taken place will just not happen. Not all small business expansion will stop; some owners will still be able to afford it. The problem, however, is that a significant chunk of small businesses will no longer be able to grow as they would like. That means fewer new jobs. That means lower tax revenue in the long run since the new employees are not there to pay taxes and the owners have no profits from a second store on which tax is due.

Remember, we are not talking about a robust sector of the economy when we speak of small business. Just today, the small business sentiment indicators were released. Here is a portion of that report:

In a disappointing reversal of several months of slow but positive growth, June’s Index of Small Business Optimism dove three points, falling to 91.4. The decline is significant, and relinquished the gains achieved earlier this year.

This is just another in a string of indicators that show the economy marching towards a double dip recession. Now, Obama wants to hammer small business again with his tax increase. It is madness.