Tax Foundation President Testifies on Threats to Small Business

September 13, 2012

‘Fiscal Cliff’ Provisions Could Hit Entrepreneurs, Job Creators Hard

Washington, D.C., September 13, 2012––Tax Foundation President Scott Hodge will testify in the U.S. House of Representatives this morning on the impact small businesses could face when the many tax provisions that comprise the so-called “fiscal cliff” expire at the end of the year.

The House Small Business Subcommittee on Economic Growth, Tax and Capital Access hearing, “Adding to Uncertainty: Small Businesses’ Perspectives on the Tax Cliff” will examine how the expiration of the 2001 and 2003 tax cuts are looming over the nation’s entrepreneurs.

Hodge’s testimony will focus on the importance of individual tax rates to business activity and economic growth. Millions of small businesses are organized as “pass-through” entities, in which business owners pay their taxes at individual rates rather than the under the corporate tax code. These smaller enterprises account for a large percentage of business income and employment in the United States.

“As lawmakers consider policies to improve the competitiveness of American businesses, they should not forget that individual income tax rates are just as important to business activity as the corporate rate,” said Tax Foundation President Scott Hodge. “Proposals to raise income taxes on high-income earners, either by increasing the top marginal rate, limiting deductions, or implementing a minimum tax, would fall very heavily on America’s non-corporate businesses. Raising taxes on them at this time could curtail their hiring and other investment plans, further delaying economic recovery.”

President Obama’s proposal to allow the Bush-era tax cuts to expire only for those earning $200,000 a year or more only highlights the folly of raising individual tax rates in the first place. Nearly three-quarters of pass-through business income was reported by taxpayers earning more than $200,000. Of the 4.2 million pass-through enterprises with employees, 90% of their business income was generated by employers with incomes above $200,000.

According to the most recent revenue estimate from the Joint Committee on Taxation, the revenue gain from increasing tax rates on taxpayers earning over $250,000 would raise $966 billion over the next ten years. This means that roughly $377 billion of these new revenues would come from successful pass-through businesses.

“This would be the largest single tax increase on American small business in history,” said Hodge.

The full text of Scott Hodge’s testimony before the U.S. House Subcommittee on Economic Growth, Tax and Capital Access will be available online after the hearing begins.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation’s Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.

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