Assessing the Small Business Tax Cut
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Early last week, the Democrats held a vote on a tax bill that defined their political philosophy but had no chance of passing. That was the Paying a Fair Share Act of 2012, better known as the Buffett Rule, which failed to get the 60 votes necessary for the Senate to take up the bill. On Thursday, House Republicans countered by passing their “Small Business Tax Cut.” The bill cleared the House handily, 235-173, largely on party lines, but it is no more likely to become law than the Buffett Rule.
Under the Small Business Tax Cut, introduced by Eric Cantor, House majority leader, any company of any sort with fewer than 500 employees would be eligible to deduct 20 percent of income in 2012, though the deduction is limited to half of cash wages paid to employees. (That means, for example, that a company with $10 million in income but a $3 million payroll would see the $2 million deduction reduced to $1.5 million.) The tax deduction would be in effect for only one year and would cost the Treasury $46 billion.
“We need to stop and think about what kind of country we want to be. And do we want to be one with lower taxes, more growth and more jobs? Or do we want to be one of more government control and fewer opportunities?” Mr. Cantor said on the House floor. “Our bill puts more money into the hands of small-business owners so they can reinvest those funds to retain and create more jobs and grow their businesses.” Mr. Cantor cited a study that claimed the bill would create “more than 100,000 new jobs a year.”
But while the bill passed the House handily, it has raised objections from partisans and nonpartisans alike. Congress’s nonpartisan Joint Committee on Taxation discounted the measure’s stimulative effects in an analysis of the bill. The tax cut’s effects on the economy would be “so small as to be incalculable,” the committee said. “The one year of tax savings provided by the bill is unlikely to make the costs of much investment in physical capital or labor recruitment and training worthwhile.” (And the new jobs would not be created cheaply, from the government’s perspective: if the tax cut did create 100,000 jobs, the cost per job would be $460,000.)
The White House, which opposes the bill, pointed out in a statement that the deduction could actually discourage companies from making investments and hiring for the year that it is in effect because those additional expenditures reduce income. “With the deduction only available for one year, it is likely that some firms would reduce or delay new hiring or new investment as a result,” the White House said.
In fact, because the deduction is so large — 20 percent, remember — and because it ends abruptly when a company reaches 500 employees, it’s easy to envision yet another way that it might depress hiring among the largest eligible businesses. Imagine that a $10 million company has 495 employees and can take a $2 million income deduction. At the 35-percent tax rate, that deduction is worth $700,000. If that company were to hire five workers, it would lose the entire deduction. (If, on the other hand, the deduction were to phase out gradually as the headcount increased from, say, 400 to 500, the deduction would be much smaller, and the choice would be much less stark for the company approaching the threshold.)
Even some Republicans objected to the bill. Tom McClintock of California, objected that the tax cut’s $46 billion cost was not offset by spending cuts. “Thus, it merely shifts current taxes into the future,” Mr. McClintock said after the vote, according to The Hill. Then he added, “nor does H.R. 9 do much to promote economic growth because it does little to reward new productivity at the margin. At best it produces a one-year ‘sugar high’ until the bills come due.” In all, 10 Republicans voted against the bill. (On the other hand, 19 Democrats voted to pass the bill.)
The measure now heads to the Democratic-controlled Senate, where it faces what judicious analysts like to call “an uncertain future.”