This week’s Presidential debate featured both of our recent S-Corp studies — the first highlighting how many Americans work for pass-through businesses, and the second making clear that the pending higher tax rates will result in fewer jobs, lower wages, and less capital investment.
On pass-through jobs:
Governor Romney: But let’s get to the bottom line. That is, I want to bring down rates. I want to bring the rates down, at the same time, lower deductions and exemptions and credits and so forth, so we keep getting the revenue we need. And you think, well, then why lower the rates? And the reason is, because small business pays that individual rate. 54 percent of America’s workers work in businesses that are taxed not at the corporate tax rate, but at the individual tax rate. And if we lower that rate, they will be able to hire more people.
On the impact of higher rates:
Governor Romney: Now, I talked to a guy who has a very small business. He’s in the electronics business in St. Louis. He has four employees. He said he and his son calculated how much they pay in taxes — federal income tax, federal payroll tax, state income tax, state sales tax, state property tax, gasoline tax. It added up to well over 50 percent of what they earned. And your plan is to take the tax rate on successful small businesses from 35 percent to 40 percent. The National Federation of Independent Businesses has said that will cost 700,000 jobs.
Washington Wire readers will recognize those statistics as coming from the two studies we’ve commissioned by Ernst & Young in the past two years. You can access these studies here:
- Ernst & Young Study on Top Rates
- Ernst & Young on Flow-Through Businesses and Tax Reform
The point of these studies was to arm policymakers with good information about how pass-through businesses like S corporations are a key source of jobs. Based on this week’s debate, we’d say they worked.
Small Business Sector Afraid of Fiscal Cliff
More evidence that the current environment of increased regulatory activity and looming higher tax rates are hurting private businesses and job creation: according to a new poll by the Tax Foundation, 55 percent of business owners and manufacturers would not have started their businesses in today’s economy, while 69 percent say that President Obama’s regulatory policies have hurt their businesses. Here’s the summary from Roll Call:
Of 800 small business and manufacturers surveyed, 55 percent said the national economy is in a worse position for them to succeed than it was three years ago.
The survey, which was released today, was commissioned by the National Federation of Independent Businesses and the National Association of Manufacturers and was conducted by Public Opinion Strategies.
The study showed that two-thirds of the respondents believe economic uncertainty in the market makes it hard for them to grow and to hire more workers, for which they hold the Obama administration or Congress responsible.
The finding that entrepreneurs would refrain from starting new businesses or hiring new workers in this lousy economy is reinforced by new research by Tim Kane at the Hudson Institute. According to Kane’s research:
- Startup businesses have historically been the source of all net new job creation; Startups create an average of 3 million new jobs a year, while established companies lose on average one million per year.
- Since 2006, startup job creation has fallen sharply, declining each year through 2011; and
- Startup job creation under President Obama is the lowest of any President in the last 24 years.
You might recognize this point from the Presidential debate. Governor Romney cited Tim’s work too:
Governor Romney: It’s small business that creates the jobs in America. And over the last four years, small business people have decided that America may not be the place to open a new business, because new business startups are down to a 30-year low. I know what it takes to get small business growing again, to hire people.
Obviously, the two studies are connected. Faced with an uncertain level of taxation and regulation, entrepreneurs are holding back on hiring and investment decisions. That’s what these studies are telling us, and that’s what we hear from our membership. Hopefully, Congress and the Administration will hear them as well and do something about it in the Lame Duck.