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An argument against Obama's tax plan

ByGROVER G. NORQUIST| 7/11/08 4:58 AM EDT

Text Size: The Tax Policy Center and the Barack Obamacampaign used some sleight of hand this week inPolitico. To quote Eric Tolder of the TPC, “Mostsmall-business people, like most everyone else, arenot really high-income.” While this is true, itcompletely and totally misses the point.Let’s start with the definition of a “small business.”Most will tell you that small-business incomeconstitutes income derived from sole proprietorships,partnerships and Subchapter S corporations.The conservative argument (and that of the JohnMcCain campaign) is that Obama’s stated plan toraise taxes on households making $250,000 or morein income is a tax increase on small business. The simple answer to this dilemma can be found in the IRSStatistics of Income Bulletin (Table 1.4, for those who are interested).So what do the data say?In 2006 (the latest year available), $706 billion of such income was reported to the Internal RevenueService. Of this, about half was reported by households in the top marginal income tax rate. Interestingly,two-thirds of this income was reported by households making $250,000 per year or more — the very samehouseholds that Obama wants to increase taxes on.

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The Obama campaign maintains that the number of small-business owners is what’s important. EconomistsThe writer argues that Obama’s plan to raise taxeson households making more than $250,000 willraise taxes on most small-business profits inAmerica.

Photo: AP

know what matters is the tax rate that’s applied to the bulk of small-business income. Make no mistakeabout it: Obama’s plan to raise taxes on households making more than $250,000 will raise taxes on mostsmall-business profits in America.What type of tax rate are we talking about? Currently, S corporations face a top tax rate of 35 percent, whilesole proprietors and general partners face a tax rate of 37.9 percent (since they’re responsible for payingboth income tax and the Medicare component of the payroll tax).Under Obama’s plan to let the scheduled 2011 tax rate hikes occur, and his plan to raise the self-employment tax on those making more than $250,000, the S corporation rate would rise from 35 percent to39.6 percent. The sole proprietor and partner rate would rise from 37.9 percent all the way up to astaggering 50.3 percent. Many Democrats in Congress have proposed making all small businesses(including S corporations) pay this 50-plus percent rate. A small business tax rate that high would be thehighest marginal rate faced by them in nearly a quarter-century. 1 |

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What would a world look like where two-thirds of all small-business income would be taxed at a 50 percentrate? The economic law that “taxing something more and getting less of it” would apply. Fewer Americanswould be interested in opening or expanding small businesses. Tax evasion and legal tax avoidance wouldspike, as tax shelters would once again become a booming industry. Since small businesses create amajority of jobs in America, Main Street closing up shop will have a direct impact on the family budget, aswell. Plants and equipment will go unused. Despite the misguided opinions of static scorers in Washington,federal tax revenues will likely decline as the economy staggers into a full-on recession.What’s the alternative? One place to look is the optional alternate tax system originally proposed byCongressman Paul Ryan (R-Wis.) and now endorsed by McCain. It would give households (including thosewith small business income) a choice between the current tax code and one with a top rate of 25 percent onall income over $100,000. This would have the beneficial effect of lowering the tax rate on most small-business income by 10 percentage points. Small businesses haven’t faced a tax rate that low in quite sometime and would be likely to respond with the creation of new businesses and more investment in existing

businesses.The McCain small business tax plan doesn’t end there. For those businesses that are organized asconventional corporations, the top tax rate would fall from 35 percent to 25 percent, the European average.For all businesses, technology and equipment — which now must be slowly “depreciated” over many years— would be immediately expensed in year one.Stepping back, voters and policymakers should ask themselves whether they want two-thirds of smallbusiness income taxed at a 50 percent tax rate or if they want nearly all small-business income taxed at a 25percent tax rate. They should ask themselves whether it’s healthier for small businesses to write off acomputer over six calendar years or to simply write it off in year one. To America’s small business sector, theanswer is obvious.

Grover Norquist is president of Americans for Tax Reform and author of "Leave Us Alone — Getting theGovernment’s Hands Off Our Money, Our Guns, Our Lives."

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Anatomy of a Scandal

Posted by

Jeffrey Lord

on 10.14.08 @ 6:09AMThere is only one word for it. That word is "scandal." That scandal is rapidly metastasizing, too. Overtaking you, your family, your business, your kid's education and, last but certainly not least, the entire globaleconomy. Begin with the scarlet philosophical thread that takes expression from thefollowing people in their own distinctive styles. William Ayers: "I am a radical, Leftist, small 'c' communist ... Maybe I'm the lastcommunist who is willing to admit it….The ethics of Communism still appeal tome." Jeremiah Wright: "God damn America, for treating our citizens as less thanhuman."