This week, I’ve asked readers to chime in on the Bush tax cuts. This guest post is courtesy of Michael Rozbruch, IRS Problem Solver and Tax Relief Blogger (for more on the topic, see the original post):

Tax cuts can actually be a good thing for the economy; they just have to be able to provide enough of a boost to lift the economy out of its rut. It just so happens that the tax cuts put in place during the Bush administration weren’t enough because of the weak economy bolstered by the mortgage melt down.

If the current administration allows the Bush tax cuts to expire, as they are hoping for, this would not only be a huge tax increase in disguise for the American people, but also will put more nails in the coffin of the small business man in this country.

In order to make the current economic situation easier to understand, it is important to review the Bush tax cuts as well as some U.S. economic history. The main Bush tax cut act originated in 2001 – it was called the Economic Growth and Tax Relief Reconciliation Act of ‘01. What really emphasized and enforced that was the Jobs and Growth Tax Relief Act of ’03. Taxes paid by millionaire households more than doubled upon the enactment of this act from $136 billion in 2003 to $274 billion in 2006.

A central U.S. policy for the last 80 years, called Keynesian economics, is the use of a federal budget deficit to counterattack an economic slowdown. It’s a way to stimulate the economy when things are bad.

With the expiration of the tax cuts put in place during the Bush administration, tax burdens would shift to the wealthy. Couples earning more than $250,000 would see the top tax rate rise to 39.6% by 2011. There also would be new limits on tax deductions, including for charitable donations.

Allowing the Bush tax cuts to expire would fall in line with President Obama’s pledge to cut taxes for the middle class while allowing tax cuts for the rich to expire. It’s a known fact that about 47% of Americans, at the lower end of the scale, don’t pay any income taxes.

Additionally, a majority of the Bush tax cuts, were enacted to help the small business owner, and as everyone knows it is the small business person that it responsible for 70%-80% of job growth in this country.

While the administration hopes to use additional revenue to fund deficit-reduction and other federal projects, the impact on businesses is not going to be good for this country; there are a lot of small business owners that will be put out of business if the administration raises taxes on people who are making $250K.

If the tax cuts are left to expire……you think things are bad now?….just wait!!!!

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Kelly Erb is a tax attorney and tax writer.

5 Comments

  1. Let me first say I think our tax/welfare system is completely broken. I ran a VITA site for 3 years, and the Earned Income Credit is one of the worst ways to get money to low income families. It’s misunderstood, and, I kid you not, people would stop working because they were worried about getting to the downslope of the EIC where their credit would start to decrease. Thus, contrary to its goal, it becomes a disinsentive to work. So, as a starting point, I think the way are tax system is structured, particularly on the low end, needs to be entirely rethought and restructured.

    With that said, the idea that a 4-5% increase on people making over 250k will force small business owners to close their doors is completely illogical. These business owners are taxed on profits, not revenues. Those profits are calculated after deducting all local and state taxes, fees, licenses, etc., so there is no “cummulative taxation” argument. And please do not forget that many small business owners receive substantial revenue in cash or in-kind exchanges, which [cough, cough] isn’t always reported in its entirety. Yes, the business will have 4-5% less to spend in the following year on additional wages, new equipment, marketing, or expansion, which isn’t ideal. In the end, though, it is a very, very, very rare business that clears 250k in taxable profits and feels it should board up the windows. Yes, there are exceptions, but the effect on 250k + earners is WILDLY exagerated.

    Congress and the administration do, however, need to ensure the extension of 179 and other sections that allow for immediate expensing, rather than capitalization, of major purchases. If they fail to do that, it could have a real and tangible effect on a small business owner’s risk calculation when deciding to expand or re-tool.

  2. It’s too bad that your guests don’t say where they got (or made up) statistics like “Taxes paid by millionaire households more than doubled upon the enactment of this act from $136 billion in 2003 to $274 billion in 2006.”

    To put this in context, here’s a Statstics of Income table on the IRS website. http://www.irs.ustreas.gov/pub/irs-soi/07in05tr.xls It shows that in 2003 it took AGI of $1.26 million to be in the top 0.1% (top one in a thousand) who as a group had income of $476 billion and paid $117BB in income tax. Fast forward to 2006, when it took over $2 million to be in the top 0.1%, who altogether reported income of $911BB and paid $200BB tax. The average rate fell from 24.6% in 2003 to 22% three years later. In 2003 the top 0.1% reported 7.57% of all AGI in the US, while in 2006 they reported 11.22% of all AGI.

    In other words, during the financial bubble years of the last decade, the income share of those at the top went *way* up, such that they paid more tax even though their tax rates went down. Was this wise policy? Judging by the results, no.

  3. Kevin:

    Thank you for your well organized and informative response. However, on an “apples to apples” comparison, assuming all deductions and NET income are the same, year over year, the small business owner will be paying more (especially if he/she is a sub-chapter “S” corporation) in taxes in 2011 than in 2010.

    Two reasons – 1., Is the income tax brackets have been increased in 2011 across the board and 2., Small businesses with payrolls up to $400,000 annually will be subject to an 8% penalty/tax of up to $32,000 (this is due to take place in 2013) if they don’t offer health care coverage to their employees.

    These 2 items combined will cripple small business owners who deliver over 70% of the new jobs in this country . In states like California, New York, and Chicago, etc., where almost 30-40% of the taxpaying public reside, it is NOT rare at all that business owners net $250,000 per year and more. Dealing in the Tax Resolution side of things, our small business case inventory is up nearly 35% over 2009 levels and 2009 saw an increase of 20% over 2008 of business owners not being able to meet their federal and state payroll tax obligations. I am predicting 2011 will be even worse than 2010 if something very favorable to small business owners is not enacted by Congress.

  4. Michael – You seem to be refuting arguments I was not making. As stated, I do not agree with how our tax system is structured, and I don’t agree with all of the current administrations tax policies. What I believe is that people should look at proposals on an issue by issue basis and not assume that something is bad for small business simply because it was proposed by Obama.

    You do not mention anything about health care or lower end tax rate increases in your original post. In fact, in what seems to be an effort to paint the Obama administration with a broadly negative stroke, you fail to mention in your comment, as you did in your original post, that across the board tax increases has never been proposed by the Obama administration. The current uproar, and what you argue in your original post, is that the increase in tax rates for 250k plus earners will have a negative effect on small business, going as far to say that it will put them out of business. My position, solely with respect to that issue, is that there is no basis for such an argument.

    I don’t particularly care for the health care provisions. I work for a firm that may be negatively affected. However, the issues are not really related. If the added health care costs are so detrimental to a business, the net income of the business will not be $250k, and the income tax rate will not increase (under the current administration proposals). As I previously mentioned and you surely know, income taxes are calculated net of all these other “add-ons” like health care, payroll taxes, FICA, FUCA, etc. All of those taxes are absolutely a burden on small business, and I would support any proposal that would help lesson the burden.

    You mention your clients are having problems meeting payroll and other tax obligations at an increasing rate. You fail to mention (or realize), that those small businesses or owners will not possibly be affected by the 250k tax rate increase because their net income is not 250k (if it is, your clients shouldn’t be having difficulty making payroll tax payments). The only s-corp’s, partnerships, and LLC’s that will be affected will be those that pay all of their state and federal payroll taxes, unemployment taxes, work comp expenses, insurance costs, sales tax, property tax, health care costs (current and new), and after all of those payments, the business STILL has 250k in net income. Those businesses are very healthy businesses, and, assuming proper financial responsibility, their owners are somewhat wealthy.

    Like I said, I’m sure there is an exception, but it’s hard for me to imagine a scenario where that 4% increase would cause a business owner or owners to shut the doors. The owners would have to be making a decision that they could go be an employee and make 250k plus in salary. Those “employee” jobs are fairly hard to come by, outside of medical, legal, dental, or other professional practices, most of which are pass-through entities anyway, and would offer no solution.

    The Obama administration has absolutely implemented measures that will be bad for small business, many of which I strongly disagree. The 250k tax rate increase is not something that can or should be discussed in the same light. Is it fair? Maybe not. But will it cause a business to close its doors or forgo expansion? No way. We are going to have to do something to pay for our deficit, and for things like the expansion of the research tax credit. The 250k rate increase needs to be discussed responsibly, rather than dismissed as just another Obama shot against small business.

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