Does Increasing Taxes On The Wealthy Hurt “Job Creators”?

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If you are looking, there are any number of reasons not to raise taxes on various groups of Americans right now. The poor continue to have it rough. The middle class is still trying to dig out. And the wealthy are the engines of growth. They are “job creators.” And when unemployment is high who wants to hike taxes on those who create jobs?

That last point in particular has become a key one in Washington. As Congress looks to find ways to chip away at the debt, President Barack Obama has said he wants to increase taxes on families with incomes of over $250,000. Republicans say no, any increase like that would hit at small business owners who create jobs.

Patchwork Nation has spent the last few days looking at this argument and thinks there are a few points missing from it.

First, that $250,000 mark is really close to the stratosphere of American incomes. Only about 4 percent of households make $200,000 or more a year and in the framework of America’s 12 county types the households are really concentrated in two places – the big city Industrial Metropolis counties and the wealthy, educated Monied Burb counties

In most of Patchwork Nation’s 12 county types, not even three percent of the households reach that rarified air.

Second, the argument that increasing taxes on those people would hurt “small businesses” is something of a stretch. It depends on what you call a “small business” and how those people choose to run their operations.

Where the Money Is

You don’t have to look at the map below for too long to see the pattern for big earners. Pick a major metro area, start at its center and move out to the counties immediately adjacent to it – look at New York, DC, Chicago, Denver, the Bay Area.

But move a few counties away and you see the green get lighter pretty quickly. This is something Patchwork Nation has noted often. Even in an era where we think of the U.S. economy as a single interconnected thing, there are vast differences between places that are even right next door to one another.

Look at Johnson County Kansas, a county holding many of the well-to-do suburbs of Kansas City where 7 percent of the households earn more than $200,000 a year, according to the U.S. Census 2009 American Community Survey numbers. Go directly down diagonally and you are in Franklin County, a Service Worker Center where less than one percent earn those wages.

The money in those $200,000 income households simply doesn’t radiate out very far in many cases. And that Kansas kind of break down fits well, with what we see across our county types in a broader sense. Most of those Service Worker Centers are extremely light on big earners -- only 1.6 percent of all households.

Moreover, even in the places where $200,000+ income is more common it doesn’t reach too far away. In hyper-wealthy Manhattan, 16 percent earn $200K or more, right across the river is the Bronx, where 1.2 percent do. Furthermore, even with all those wealthy households in Manhattan, the poverty rate in that county is also 16 percent, higher than the state average.

What is a “Small” Business Owner?

But if those high earners don’t necessarily lift a lot of nearby boats with spending, what about the impact they have as job creators. Republicans in Washington maintain it is important to not raise taxes on people making $250,000 a year or more because many of them are small business owners and a hike in their taxes means they won’t have the money they need to hire more workers.

This is where things get tricky. Define small. According to the Small Business Administration a “small” business can have as many as 1,500 employees or do more than $34 million in business.

So yes, technically, small businesses employ millions of Americans. But those aren’t the kinds of the firms people think about when they think of small businesses and, in many ways, they are right.

There are about six million small businesses in the United States, says Al Lee, director of Quantitative Analysis at the firm Payscale, and half of them have four or fewer employees. In fact, three-quarters of those small business, he says, have fewer than 14 employees.

And is $250,000 a reasonable amount of money to expect those people to make? “In their dreams maybe,” Lee says and he is in a good position to know. Payscale, researches and tracks employee compensation data and has the world's largest database of individual employee compensation profiles.

“About 10 percent said they made less than $25,000 and about 10 percent said they made more than $175,000,” Lee says. “For a lot of small businesses it is a struggle to make anything – they have cash-flow issues.”

But what about those wealthy small business owners out there? Are these people less likely to create jobs with a personal tax hike? Probably not, Lee says, because when business owners run firms that make that kind of money they are rarely running the business through their own bank account using their own income tax returns to pay that bill.

“Over 20 employees you are probably incorporated,” Lee says. “I find it very hard to believe that there would be many people in the category they are talking about. You might have some financial firms, some small law firms,” he pauses and adds with a chuckle. “I don’t think those are the employers people have in mind when they say job creation.” Probably not.

How We Got Here, Where We Are Going

In other words, somewhere in the “job creators” discussion, reality got lost.

There is a series of small facts and definitions that are truths – more than half of all Americans work at “small businesses” and many of those workers are employed by top earners. But raising taxes on those “small business” owners would likely have little direct effect on job creation because they are not Mom and Pop shops, they are much bigger, usually incorporated entities.

None of this is an argument for raising taxes on the wealthy. Some people are opposed to tax hikes of any kind and the American economy is obviously still fragile.

Maybe more to the point, there just may not be much the government can do to spur hiring right now. For all the talk of job creators needing government incentives or lower taxes, businesses create jobs when if makes sense for them, when they have sufficient demand to need to hire people. And with the U.S. and global economy as shaky they are, it is hard to imagine demand spiking anytime soon – whatever Washington does.


Raising Taxes on Small Business Owners

I'm a tax preparer and the bulk of my clients are small business owners. In general, they have less than $10M in gross revenue and less than 25 employees. Most of the incorporated clients have elected subchaper S status with the IRS. The owners would not be effected by the "millionaire" tax. Because they are required by the IRS to pay themselves "reasonable compensation", their W-2 wages are deductible by the corporation. Therefore, the taxable profit of the corporation passed through to their personal income tax returns is lower than most people would expect. Furthermore, due to the struggling economy, my clients are doing the best that they can to keep the doors open. There is less income tax due when your corporation is making less money.

taxing the wealth

I was wondering if it makes a difference if your small business is a Sub-chapter S corporation? After all, profits are distributed at end of fiscal year to owner as ordinary income. This might impact small business owners. I don't know if this would effect the taxes on small business owners if their taxes are increased. Would it?