As you undoubtedly know, the deal that was reached raised taxes, but did not decrease spending.
Newspapers have been full of stories about the federal income tax increase on taxpayers earning $400,000 or more ($450,000 for families), bringing the top federal income tax rate up to 39.6 percent from 35 percent. But far from being a tax hike only on the rich, many businesses pay their taxes through the personal income tax code. According to data from the U.S. Treasury Department, at least 67 percent of all income generated by the most common types of small businesses falls into this tax bracket. There is no question that these higher tax rates will translate into fewer job growth opportunities in the U.S. at a time when they are badly needed.
Neither part of that charge holds up, as we explain in a new analysis. For starters, the frequently cited claim that letting the high-income tax cuts expire would seriously harm small businesses relies on a highly exaggerated definition of “business” that treats any filer with any pass-through income as a business owner. (A pass-through entity passes its profits through to its owners, who pay tax on them at the individual rate.)
Under that definition, professors who occasionally get paid for giving a speech or doing some consulting, lawyers and accountants whose firms are organized as partnerships, and corporate executives who get paid to sit on other firms’ boards of directors are treated as small business owners. The definition is so broad, in fact, that under it, both President Obama and Governor Romney would count as small business owners — as would 237 of the nation’s 400 wealthiest people.
The good news is that states can help counteract some of the effects of these federal actions. In Arizona, for example, the capital gains tax cuts that were signed into law by Governor Brewer will bring that effective tax rate from 4.54 to 3.4 percent over the next three years. That cut can be phased in faster to at least partly counteract the federal capital gains tax hike on job creation. And any state with an income tax could go even further by eliminating its capital gains tax entirely.
Additionally, a legislature can allow a full 100 percent deduction for equipment purchased by small businesses in their state. Not only would this make a state more competitive in attracting jobs, but it will also add an important bit of certainty to the business plans of employers who aren’t sure what the federal government will do at the end of 2013.
Azcvoices.com is a network of community bloggers created by The Arizona Republic, azcentral.com and 12 News to highlight diverse viewpoints. Members' opinions do not represent the views of Republic Media.
Bio: I grew up in Silver Spring, MD, and an adventurous streak led me to join the Navy. I moved to Arizona in 1997 after serving 10 years in the Navy to work in semi-conductor manufacturing. I got involved in national and Arizona politics in 2003. I ran for 2006 State Senate in Ahwatukee and was a Delegate to the 2008 Democratic National Convention. I now live in North Central Phoenix with my boyfriend, Mark, and our three dogs. I've been blogging for Democratic Diva since 2007 about local and national politics with a strong emphasis on women's issues.