Our friends at McGladrey LLP have a new survey out of mid-market firms showing just how hard those companies have been hit by the tax rate hikes championed by President Obama and his allies in Congress.
Recall that in the run-up to the Fiscal Cliff, Ernst & Young released a paper on our behalf that predicted the higher rates set to begin in 2013 would hurt investment and job creation by significantly hiking taxes on mid-sized employers. Over the long-term, E&Y estimated the U.S. would lose 710,000 jobs.
Now McGladrey’s survey shows just how those job losses and lower investment levels emerge. According to them:
While middle market companies are adding jobs, and have been for several years, some have had to reduce their workforces over the past year. More than 50 percent of the middle market companies that reported having cut jobs (56 percent) said the 2013 tax reform bill was a factor in their decision to take these actions.
McGladrey defines “mid-market” as businesses with revenues between $10 million and $1 billion. Census Department statistics make clear that firms in that revenue range are a huge source of employment in the U.S. and an important part of the economy. Raising tax rates on these employers made little sense back in 2012 and even less sense now.
Another key finding in the survey provides additional support to the Harvard study on bonus depreciation we highlighted last week. As you’ll recall, the study found that US companies responded strongly to the investment incentive, with privately-held companies responding strongest of all.
The McGladrey study reveals the other side of that coin. When investment incentives are allowed to expire, as Section 179, the R&E tax credit, and bonus depreciation are right now, then firms respond by reducing their investments. According to McGladrey:
Half of all companies that reported cutting back on research and development (R&D) said that the reform law had influenced their decision to do so. Not surprisingly, the manufacturing industry – a key component of the middle market – reported the most severe impacts. More than three-quarters (78 percent) of middle market manufacturers said that the R&D tax credit’s expiration had led to an increase in their tax bills, and 63 percent of manufacturers that reported having cut R&D over the past year said the tax credit’s expiration contributed to their decisions to do so.
So there you have it. We now have prospective and retrospective evidence that hiking rates on Main Street employers hurts investment and job creation. With the debate over tax reform focused almost wholly on large multinational companies, the McGladrey survey is a solid reminder that tax reform needs to embrace the whole business community, not just publicly traded companies.