Would an income tax hike hurt hiring?

A banner is posted by activists critical of corporate tax rates during a march and rally on April 17, 2012 in Los Angeles.

Kai Ryssdal: It's a truism of American electoral politics that candidates will say basically anything they want during a campaign, and it gets largely accepted as fact. Even when the only two candidates in a race are saying exactly opposite things.

Take, just for instance: President Obama, Gov. Romney and this week's topic -- taxes. Mr. Obama wants to let taxes on the richest Americans to go up; he says they can take it and besides, it won't hurt the economy at all. Mr. Romney says no indeed, raise taxes on those making a quarter million dollars or more and that hurts job creators and clobbers the economy.

We thought we'd do a little number crunching of our own. Here's Marketplace's Mitchell Hartman.

Mitchell Hartman: I started with a group called the S Corporation Association. They represent business owners who pass their business’s income through a corporation, partnership or sole proprietorship. Then they file a personal income tax return. These are the people whose taxes might go up.

There are 25 million of them, says executive director Brian Reardon.

Brian Reardon: Of those 25 million, 2.1 make more than the $250,000 threshold.

The other 23 million? They don’t make enough to get dinged under the president’s proposal. Let’s ignore them.

But not all the business owners who make $250,000 actually pay the top rate. A lot of them pay the alternative minimum tax. So the real number whose taxes might go up? Just under a million.

Still, they’re important, says Reardon. Their businesses make most of the profits and employ half of all American workers. But would they slow down their hiring if they had to pay more in taxes?

Bill Gale co-directs the Tax Policy Center at the Brookings Institution and worked for the Council of Economic Advisers in the George H.W. Bush Administration.

Bill Gale: All that’s being proposed by Obama is that those top two rates go back to the rates they were in the ‘90s. Entrepreneurship was quite healthy in the 1990s. There’s no reason to think that it would choke off huge amounts of business activity right now.

Gale also points out some of the highest-earning small businesses are high-flying financial partnerships. Or, sole practitioners -- doctors, lawyers, business consultants. Are they going to create more jobs just because their taxes don’t go up?

Small-business tax advisor Barbara Weltman.

Barbara Weltman: No, they’re never going to get bigger than one owner, but they’re still going to try to grow. And whether they take on an employee, or they use independent contractors, if they have more money to spend to enhance their business, they’re going to.

Bottom line: By our calculations, only a small fraction of the business owners who pay taxes as individuals, would see their tax bills go up under Obama’s proposal. And for many of them, the primary reason to hire or not hire probably isn’t their tax bill, but general business conditions. But for the ones that run the most vibrant growing businesses, it could make a difference.

I’m Mitchell Hartman for Marketplace.

About the author

Mitchell Hartman is the senior reporter for Marketplace’s Entrepreneurship Desk and also covers employment.
Log in to post16 Comments


Good point Emma L. Plus, aren't there tax credits available for small businesses when they hire?

Do a thought experiment:

would increasing the tax on profit to 99% encourage or discourage seeking profit?
A rare company would stay in business, happy to keep just 1%. But most would not go out of business.
Just follow this logic, a 98% tax would discourage fewer companies to fold, etc..
So any kind of tax on business discourages some business creation/expansion. If you tax something you get less of it.
Econ 101.

Did you really pass Econ 101? Your entire argument is based on a fallacy - no one would run a business if 99% of the profits had to be taken off the top for taxes. So now let's analyze a real situation under the changes to the marginal tax rates being proposed by President Obama and the Democrats in Congress. Let's look at a family of 4 earning $250,000 per year from labor. Of course, these folks will not be touched by the new rates since they have deductions and exemptions galore which pull them into a lower bracket. Exemptions alone are $26,400 and average deductions are $44K (http://www.forbes.com/sites/baldwin/2011/04/16/compare-your-tax-deductio...) for a total of $70K. So they will not begin to pay this marginal tax until they have earnings of over $320K. And then it is only on the income above $320K no matter how much they earn. So let's consider our struggling business person. To make our example interesting, let's say she earns $320K right now. Her effective tax rate before the increase is 19.6%. That is because you only pay higher rates on the money you earn about the lower bracket for each bracket your income overlaps. So she has no added tax burden. But next year as a result of the increased economic activity spurred by higher government spending from the new tax revenue, her business grows by 1% or an additional $3200. Now she must pay $1267 in tax on this amount, including the rate increase. The amount of added money due to the tax increase is $221. So all in, she is ahead by $1933. And the effective tax bracket in now 19.66%. Seems like a sweet deal to me. Of course, if Democrats win control of Congress and actually spend as much money as the Republicans did under Reagan or Bush-Cheney, then the amount of GDP growth could be 4% or more. Let the good times roll.


With Generous Support From...