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Would an income tax hike hurt hiring?

Mitchell Hartman Jul 11, 2012

Would an income tax hike hurt hiring?

Mitchell Hartman Jul 11, 2012

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.

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