Business, Small (or, B-S)

Okay, it's time to parse one of the big recurrent themes of the Republicans in Congress, and what Pat Buchanan would call their "Amen Chorus" in the pundit class: Raising taxes on the top 2% would hurt Small Business (the phrase is always, like the name of the deity, capitalized --we will follow that custom here, out of a deep respect for American Religion).

The argument goes more or less like this:

• Most "Small Businesses" are, in fact, flow through entities (e.g., sole proprietorships, limited liability companies, partnerships), the profits of which are taxed on the returns of their owners. Hence, they are taxed at the individual rates.
• Therefore, increasing the tax on upper-income individuals means increasing the tax on their companies, in all these cases.
• When you increase taxes on Small Business, you prevent those companies from hiring more employees. So you stifle growth and employment.

Now, I suppose the first thing to point out are the underlying assumptions:

1. The Small Businesses in question are profitable enough to generate at least $250,000 in profits for (each of) their owners, assuming they file joint returns.
2. Given the opportunity to increase the business by, say, gaining a new customer that would require hiring a new employee, the owner would gladly hire the new person if the owner faced a tax rate of 35% on the extra profits thereby generated. But he would forego that opportunity if his tax rate on the resulting profits would be 39.6%.

As it is only the profits in excess of $250,000 per owner that would be taxed at the higher rates, the additional tax on, say, a $300,000 profit would only be 4.6% of $50,000, or $2,300. Not zero; but not exactly confiscation.