Politics & Government

Would ending Bush tax cuts hurt small businesses?

WASHINGTON — Lonny and Robin Kocina started their business in the laundry room of their house more than 20 years ago, and they now employ about 45 people. However, they worry that Washington lawmakers are about to stifle their effort to keep their business growing.

When members of Congress return to Washington on Monday after a nearly monthlong recess, Topic A will be taxes.

Should the Bush-era tax cuts be extended? Should the top individual income-tax rates, now 33 and 35 percent, return to the pre-2001 levels of 36 and 39.6 percent, as President Barack Obama and Democratic congressional leaders want?

All pre-Bush tax rates automatically will go back into effect on Jan. 1 unless Congress acts to extend the lower Bush-era rates. Democratic congressional leaders, with a renewed push this week from Obama, are eager to extend the lower rates only for individuals who earn less than $200,000 annually and joint filers who make less than $250,000.

Republicans want the rates extended for everyone; their top argument is that the higher rates would punish small businesses such as the Kocinas' and chill the struggling economic recovery. Republicans are backed by a vocal chorus of small business owners, a formidable lobby on Capitol Hill.

"Part of the reason businesses aren't spending now is they're worried what this government is going to do," Robin Kocina said. With her husband she runs Kocina Branding & Marketing Companies in Burnsville, Minn. It helps plan events, advises clients on media and designs Internet sites. It's also down about a dozen employees since the recession.

"I come to work every day thinking of how to create jobs, and I have to have the money and resources to do that," Lonny Kocina said. "You don't want to have government working against you."

Craig Fritsche, the president of a Virginia lumber company, argues that much of the money that businesses such as his make is plowed back into the company.

"We buy trucks. We hire more people," he said.

Small businesses generally are regarded as companies that have fewer than 500 employees, but there's no widely accepted data that define America's small businesses, said Roberton Williams, a senior fellow at the nonpartisan Tax Policy Center, a joint venture of the Urban Institute and The Brookings Institution, two center-left Washington research centers.

Small business owners often pay taxes at individual income-tax rates rather than corporate rates. An increase in their rates, said Senate Republican leader Mitch McConnell of Kentucky, "will have a devastating impact by raising taxes in the middle of a recession."

Skeptics counter with three arguments: Higher rates would affect only a tiny percentage of small business owners, it's unclear which small businesses would be affected and an increase of only a few percentage points in tax rates is unlikely to discourage entrepreneurs.

Treasury Secretary Timothy Geithner told the Center for American Progress, a liberal group, last month that the increase would affect fewer than 3 percent of small business owners.

The Tax Policy Center agreed. Congress' Joint Committee on Taxation estimated that about 750,000 taxpayers with "net positive business income" would pay the higher rates.

Republicans maintain that raising taxes on successful small businesses would make them reluctant to hire and invest, and that would weaken the economy.

Not so, Geithner said.

"This argument apparently counts anyone who receives any type of partnership or business income as if they were a small business," he said. "By this standard, every partner in a major law firm and every principal in a major financial institution would count as a separate small business."

That debate illustrates why it's hard to get an objective read on how tax policy could affect "small business," since the term applies to a wide, hard-to-define array of interests, from law firms and doctors' offices to small manufacturers and retailers.

Some experts say that successful small businesses make investment and hiring decisions without regard to a potential small tax hike.

"A company will hire if they think they can make a profit off what they think the worker will produce," said Leonard Burman, a public finance expert at Syracuse University's Maxwell School. If expansion would yield more profit, "it doesn't matter whether the employer gets to keep 60 or 65 percent of the additional profit."

In addition, Burman said, extending the top Bush-era tax rates — which would deny the Treasury an estimated $679.6 billion over 10 years, deepening the federal debt — could help push up interest rates. That might "have a very deleterious effect on investment and hiring decisions of all businesses, including entrepreneurs," Burman said.

Terry Gardiner, the national policy director for the Small Business Majority, an advocacy group, said that small businesses were more concerned about government policy involving access to capital and controlling spiraling health and energy costs than the debate over extending tax rates.

Gardner said that his companies were more eager to see the Senate approve a $30 billion loan fund for small business, due for debate and possible final vote next week. The Treasury Department would administer the loan fund through community banks to get money into the hands of small business owners.

However, Bill Rys, tax counsel at the National Federation of Independent Business, the leading small business lobby, said the prospect of higher rates was a serious concern. Business, he said, wants lower costs and stability.

"It's not a good idea to add to the uncertainty," he said.

Small business owners agree.

"You have to keep thinking of something people will spend money on, and it's really difficult," Lonny Kocina said. "Government is necessary, but not very nimble. Let me keep my money and use it the way I see fit."


National Federation of Independent Business on taxes

National Small Business Association on taxes

S Corporation pros and cons

Geithner speech on taxes

Tax Policy Center small business tax analysis

Congressional Budget Office analysis of tax provisions

How marginal tax rates work

2010 tax brackets


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