By SEN. SAM BROWNBACK | Posted Friday, July 24, 2009 4:20 PM PT
Small businesses have always been the engine of the American economy and the heart of the entrepreneurial dynamism that characterizes our society.
Even today, in our age of globalization and multinational corporations, small businesses make up more than 93% of all business in the U.S., employ more than half of U.S. workers, and are responsible for 63% of all the new jobs created.
In economic downturns, small businesses are even more important; in the current and most recent recessions, small businesses have been responsible for three out of every four new jobs created.
This makes it all the more disturbing that the Democratic health care reform proposal emerging from the House is funded in part by a surtax of up to 5.4% on high earners. A full third of this new tax revenue would come from small businesses.
As the president has repeatedly said, creating jobs right now is our No. 1 priority.
Why in the world, then, would the Democrats suggest paying for health care reform by raising taxes on the majority of small businesses with more than 20 employees?
Higher tax bills for small businesses could force them to lay off employees or reduce the number of new employees they hire. Job-killing tax hikes are not a prescription for economic recovery.
And the small-business surtax is not the only tax increase being proposed at this perilous time for our economy.
In addition to a graduated surtax on the two top brackets, the Democrats’ proposal includes raising the upper-income brackets from 33% and 35% to statuary marginal rates of 36% and 39.6%, as well as bringing back the “hidden tax increases” of PEP (the Personal Exemption Phaseout) and Pease (the limitation on itemized deductions), which raise the effective marginal rates in the top two brackets to 41% for a family of four.
Three-fourths of those affected by these rate changes are small-business owners.
All in all, a risky new burden to place on some of the most productive players in our economy at a time when we need their entrepreneurial spirit the most.
All combined, small businesses could be subjected to federal marginal tax rates as high as 49%, and this does not include state and local tax rates.
A Tax Foundation study found that effective marginal tax rates for small businesses would exceed 50% in 39 states under President Obama’s proposal.
At a time when creating jobs should be our first priority, it is vital to minimize harm to small businesses.
According to the Small Business Administration, one-third of new employer establishments fail within two years, and a major factor in the viability of any small business is its ability to hire employees.
As businesses pass on the plethora of new taxes proposed by the administration in the form of lower wages to workers and higher costs for consumers, the resulting reduction in demand for products and services will lead to further job losses.
The simple fact is that businesses cannot hire new employees — or keep the ones they have — if Uncle Sam takes away more than half of their profits.
And the multitude of tax increases President Obama has planned will harm the economic environment in which businesses operate and workers seek employment.
We must remember that the proposed new tax increases — on everything from energy to small business — will inevitably be passed on to consumers in the form of higher prices, which could reduce the demand for businesses’ products and services and force businesses to further scale back on operations and employment.
The bottom line is that the Democrats’ proposed tax increases will make it more costly for small businesses to hire and keep people on the payroll.
Congress and the administration should look at policies that promote job growth.
Sen. Brownback, a Republican, represents the state of Kansas.