At the beginning of 2013, the US government faces a series of automatic tax increases and spending cuts. Long before the election, way back on February 29, Federal Reserve Chairman Ben Bernanke described these budget changes as a “massive fiscal cliff” that Congress should address.
Of course, Congress had to wait nine months to see how the election would turn out before it could debate the issue.
There are two parts to Bernanke’s 2013 fiscal cliff.
“Sequestration” refers to the spending cuts contained in the 2011 Budget Control Act. That’s the formal name for the deal that resolved the 2011 debt-ceiling stalemate. According to Politico, both domestic programs and defense spending will be cut by roughly 8.2 percent.
Sequestration is a potentially serious problem that could put many government employees out of work. As it is, declining government employment has been a major reason behind America’s lingering high unemployment. Though sequestration will bring welcome cuts in defense spending, it will also result in large-scale government layoffs.
Tax increases are the other half of the fiscal cliff. “Taxmageddon” refers to the supposedly temporary tax cuts that will expire in 2013. These include the 2001 and 2003 Bush tax cuts for the rich, as well as the 2011-2012 reduction in Social Security taxes for everyone else. Taxmageddon isn’t so much a tax increase as a return to normal levels of taxation.
Taxmageddon is arguably a good thing. It will restore the tax rates that were in place throughout the 1990s, the last time the US economy approached anything resembling prosperity. The last four times the economy grew by 4 percent were the four years before the Bush tax cuts.
Republican objections to reversing the Bush tax cuts focus mainly on their effects on small businesses. Speaker of the House of Representatives John Boehner never tires of citing small business job-creators as the reason for keeping the Bush tax cuts in place. “We’re not raising taxes on small-business people,” Boehner stated categorically in a November 5 Politico interview.
Never mind that a poll conducted by advocacy group Small Business Majority shows that most small businesses are more concerned about spending cuts than about tax increases on the wealthy. In fact, the tax increase they’re most worried about is the looming increase in the Social Security taxes paid by their employees.
According to analyses by Factcheck.org, only 11 percent of the taxpayers affected by Taxmageddon are small businesses, only 8 percent of small businesses report over $200,000 in annual income, and just over 20 percent of small businesses actually employ anyone other than the businessowner. No wonder small businesses don’t care about the Bush tax cuts.
Analyses from ThinkProgress show that small business employment actually grew twice as fast before the Bush tax cuts as after them. Of course, this was partly because the economy as a whole grew faster in the 1990s than in the 2000s. But economic theory suggests another reason as well.
American economists generally argue that high marginal tax rates discourage entrepreneurs from hiring employees. When more of their income is taken in taxes, successful entrepreneurs cut their wage bills in order to keep more money to themselves. Careful econometric studies show this to be at least partly true.
There is, however, another side to this story. High marginal tax rates on incomes over a quarter-million dollars only affect the decisions of successful, highly profitable small businesses. It may be true that these businesses scale back when their income taxes go up.
But most small businesses are not successful, highly profitable businesses that yield their owners more than $250,000 a year. Most small businesses are struggling to get to that level. These small businesses benefit when more profitable businesses scale back.
Contrary to public perceptions, OECD data show that low-tax America has among the lowest rates of entrepreneurship in the world. Uniquely among major economies, more than 50 percent of Americans work for companies that employ 250 or more workers. America is about as unfriendly to small business as a country can get.
What Speaker Boehner and his allies forget is that most small businesses earn small profits – when they earn a profit at all. While Taxmageddon may hurt the owners of a successful large-scale fast food franchisee, it will help the mom-and-pop diners that are trying to compete with them. While it may hurt the partners of large medical practices and city law firms, it will help the family doctor and the country lawyer.
Taxmageddon will – to some extent at least – help level the competition between the few big winners of today’s austerity economy and the many losers. The big winners hate that. But for everyone else, the biggest problem with Taxmageddon is that it doesn’t go far enough toward restoring a sane level of taxation on America’s highest-earning individuals.