The Democrats and Republicans have been debating expiring the tax cuts imposed during the Bush Administration. The Democrats argue that this has led to a higher deficit (which the US is not able to afford any more) and has not led to a significant increase in employment. Historical evidence and IRS reports show that the tax increase will affect only about 3% of small businesses. This is also because many businesses do not have enough income to be affected by the tax increase. Only the wealthiest Americans will really be taxed. The Republicans, however, argue that the small businesses will be hit hard by the tax cuts as their income is generated from their higher income owners. Thus, the small businesses can be considered 'pass through' entities (they don't pay taxes themselves but their taxes are paid by the owners). The debate is still on-going. According to critics, the rise of untaxed corporations is giving companies set up as small businesses an unfair advantage.
It is reasonable to say the Democratic approach is to increase taxes to the wealthiest Americans and thus reduce deficit. This will not affect the small businesses and thus will not affect the rate at which they hire. By reducing the deficit, there is an increase in national savings, leading to a decline in interest rates and thus encourage investment. Also, it is likely that businesses (such as the restaurant business) will still hire the same amount of labor it needs to serve customers but may cut down on other costs like paving parking lots, technology etc.
However, another perspective to take into account is that firms of all sizes contribute to the welfare of the economy, not just small businesses. So to tax larger firms will eventually affect the smaller businesses too.
I think the tax cuts for Americans making over $250,000 a year should be allowed to expire. Wealthy corporations and individuals are already hoarding cash because they still perceive the investment climate as risky. Using tax revenue to make the deficit more manageable could lower interest rates and lead to higher investment even if rich people and businesses have slightly less wealth. Besides being economically responsible, I also think that allowing the tax cuts on the wealthiest households to expire is more socially just because their hoarding of cash is preventing large segments of our population from having opportunities to work and earn an income for themselves.
ReplyDeleteI do not see this as a long term solution to the problem, since interest rates are already very low and yet we don't see a lot of investment happening.The only way to spur a recovery is if people start spending.Increasing taxes just seems counter intuitive to that goal.
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