Taxes and Small Business Job Creation: How to get it done

From Chris Edwards at the Cato Institute:

A little background first, Taxes and Small Business Job Creation to get you started.

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  The chart shows that the average top OECD rate fell from 46.7% in 2000 to 41.5% in 2009. If we let the Bush tax cuts expire, we won’t be simply going back to our situation in 2000—the world has changed since then as other countries have adopted more competitive tax rates.

• President Bush cut the top federal tax rate by 5 percentage points, but the average top rate in the 30 OECD nations has also fallen by 5 percentage points since 2000.
• Unless policymakers extend current tax relief, the combined U.S. federal-state top rate will increase from 41.9% to about 46.5%, based on OECD data. That will give us about the tenth highest rate among the 30 OECD nations.
• President Obama’s proposed top federal rate of 39.6 percent is 41-percent higher than the 28-percent top income rate achieved in the late 1980s after the bipartisan Tax Reform Act of 1986.

Chris has many bulletpoints on the case for extending the Bush tax cuts.  Be sure to read them all. In other news, forty-seven Democrats have publicly demanded that Pelosi acquiesce to an across-the-board extension of existing tax rates on capital gains and dividends:

The debate over what to do about the expiring Bush-era tax cuts has focused mainly on income tax rates and the fight between Democrats and Republicans over maintaining the tax breaks for the wealthiest Americans. But in a letter to the House speaker, Nancy Pelosi, 47 rank-and-file Democrats urged Congressional leaders to maintain lower tax rates on dividends and capital gains that are also due to expire on Dec. 31.
“Our fiscal policy should be one that maximizes economic growth and private sector job creation,” the lawmakers, led by Representative John Adler, Democrat of New Jersey, wrote.
“By keeping dividends and capital gains tax rates linked and low for everyone, we can help the private sector create jobs and allow seniors and middle class households to save and invest more,” the Democrats added in the letter.

Note the phrase for everyone.  A hike in capital gains tax rates will discourage both initial investments and turnover in capital, both of which are necessary to expand the economy.  It has to apply to those with the most capital on hand in order to have the maximum effect.  It doesn’t do a lot of good to penalize those with the most potential to expand the economy through new ventures and significant expansion of existing projects and companies. This also extends to income taxes as well, since many business owners file their business income as individual income  (pushing them over the $250,000 limit).  Taking more money from this class of entrepreneur means less capital for hiring and keeping employees, capital investment, and so on.  The exact same arguments apply to income tax rates, perhaps even more so since the very wealthy can usually structure their cash flow as income, dividends, or capital gains depending on which method provides the least amount of loss.