President Obama argued:
Under my plan,
97% of small businesses would not see their income taxes go up.
Governor Romney says, well, those top 3%, they're the job
creators, they'd be burdened. But under Governor
Romney's definition, there are a whole bunch of millionaires and
billionaires who are small businesses. Donald Trump is a small business.
Now, I know Donald Trump doesn't like to think of himself as small
anything, but that's how you define small businesses if you're
getting business income.
To which Candidate Romney responded:
Mr. President, you're absolutely right, which is that, with regards to 97% of the businesses are not taxed at the 35% tax
rate, they're taxed at a lower rate. But those businesses that are in
the last 3% of businesses happen to employ half of all
the people who work in small business. Those are the businesses that
employ one-quarter of all the workers in America. And your plan is to
take their tax rate from 35% to 40%.
Their debate centers on "free-flow enterprises," businesses that are not taxed at the corporate rate but whose profits appear on their owners' individual income statements. These profits are taxed once, at the shareholder’s individual tax rate for ordinary income, for which the top rate is currently 35%.
The numbers Mitt Romney cited originate with a controversial paper by Ernst & Young's Drs. Robert Carroll and Gerald Prante, which claims flow-through businesses accounted for nearly 95% of all business entities and employed 54% of the workforce in 2008. Romney argues the top 3% of these flow-through businesses will fall under Obama's tax increase and hire fewer workers.
Should Missouri worry? On the IRS list of states' adjusted gross income, Missouri came in #21 with flow-through business (s-corps & partnerships) as a little under 5% of the income reported in the state.
Although Missouri is not at the top of the list in AGI made up by flow-through businesses, New York's AGI is composed of 6.4% flow-through business, and Ed Gerrish of TaxFoundation.org notes,"... Allowing the Bush tax cuts to expire would disproportionally draw more tax dollars from these states than others."
I find it interesting that Romney replied to Obama during the debate that "there are all these studies out there..." implying that you can find whoever you want to conduct a study to say whatever you want. Besides the obvious shock value of this statement (or not...), I just think that citing any kind of study or paper after a statement like that is just confusing and not helpful to your argument. But citing a paper that has been critiqued by many other professionals just cannot help your credibility!
ReplyDeleteRegardless, if Obama is elected and actually carries out his plans (another argument entirely) Missouri as a whole probably has nothing much to worry about, at least in this argument. First of all, I argue that higher tax rates don't necessarily mean having to worry, as longs as those rates are proportional and not excessive. Second, Missouri is just not at as high a risk as many of the other states. This plan will just not be able to impact us as much as many people think because "flow-through" business are just not big enough to cause such huge problems.
Hey, Kelsey! Thanks for your comments.
ReplyDeleteFirst, I would like to say that professional critique, in and of itself, does not erase the credibility or relevance of a paper. Take the recently reported jobs numbers from the Bureau of Labor Statistics; they have received significant political criticism, but I, and most economists I have read, believe them to be accurate.
Second, the level of "proportional" and "not excessive" taxes is an incredibly complex and hotly debated issue. You may be right; Obama's new taxes may not be excessive. However, what economists are always trying to figure out is whether the disincentive of higher taxes on corporate profits is less than or greater than the additional revenue generated. In addition, though the federal bottom line may be better THIS year, will higher taxes now handicap economic growth over the long run? It is a really complicated question, and I don't believe anyone can claim to know for sure.
Lastly, you are right. Missouri is not at risk to the degree of some other states; we're somewhere in the middle of the pack. Again, it is very difficult to see the results of tax policy, both now and in the long run.
As anecdotal evidence, take the city of Dallas. I worked for a private company headquartered there that netted over $200 million a year in profits. Several times, people around me mentioned Dallas's huge number of corporate headquarters and attributed the boom to Dallas's low tax rate.
"Dallas's attractions include a very favorable business climate, according to Mayor Tom Leppert. There's no corporate income tax, building costs are relatively reasonable and regulations are minimal. 'It's a great place to do business," he said, "especially attractive for companies from high-tax states.'" (http://money.cnn.com/2010/06/22/real_estate/fastest_growing_metro_areas/index.htm) As one result, Dallas was cited as one of America's "most recession-proof" economies (http://money.cnn.com/2010/06/22/news/economy/recession_proof_cities/index.htm).
Tax policy is all about incentive structure, and high taxes are often a strong incentive for businesses to move their companies elsewhere. However, it's a very complicated issue, and I'm barely a novice evaluating all of this.