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How, exactly, does spend and tax help small businesses?

Raymond Keating

TheHill.com recently reported that House Democrats are focusing on the party’s small business agenda as a way to regain ground among voters.

But considering the policies that a Democratic White House and Democrat-led Congress have been pushing for the past 20 months, is that really a smart strategy?

Consider, for example, federal spending and taxes.

While spending grew at a rapid rate under Republican-controlled government, it has skyrocketed under Democrat leadership.

According to the Office of Management and Budget midyear budget review released in late July, federal spending is expected to hit $3.603 trillion at the close of the current budget year at the end of September. That would be higher than last year’s $3.518 trillion total.

It also would leave a projected budget deficit of $1.471 trillion, about 10 percent of U.S. gross domestic product.

Spending is expected to jump further next year to $3.842 trillion, with the budget deficit staying in the same neighborhood. But that deficit projection depends very much on federal revenues resuming strong growth, which is a large and dubious assumption if the economy continues to struggle.

Keep in mind that as recently as 2007, federal outlays registered $2.729 trillion. That means from 2007 to 2011, federal outlays will have jumped by better than 40 percent.

And according to President Barack Obama’s own OMB projections, no serious effort at controlling spending can be seen in coming years. But for a projected one-year spending reduction in 2012, growth in outlays quickly resumes, topping $4.1 trillion in 2014, for example.

Now, how exactly is all of this government spending supposed to be good for small business?

Supporters of big spending claim, first and foremost, that this is some kind of economic stimulus. Of course, there is no evidence from history or common sense economics that supports such an assertion. After all, more government spending, by definition, means fewer resources available for the private sector.

Given the two government-centered stimulus efforts passed in 2008 and 2009, our economy for nearly three years has only sunk, showing that massive increases in government spending are economic negatives, not economic stimuli.

Then there’s the problem of government spending leading to increased taxes. At the end of this year, the 2001 and 2003 tax relief measures are set to expire. The president has called for limiting these tax increases to upper income earners. Three measures are worth noting:

The two top personal income tax rates would be increased from 33 percent and 35 percent to 36 percent and 39.6 percent, respectively.

The top capital gains and dividends tax rate of 15 percent for individuals would be increased to 20 percent. The same increase would be imposed on dividends.

Under current law, the death tax expired this year, but is set to return in 2011 with a top tax rate of 55 percent (60 percent for certain estates) and a $1 million exemption level. President Obama has called for re-imposing the death tax at its 2009 levels, with a top rate of 45 percent and $3.5 million exemption.

Of course, if Congress does nothing over the next few months, even larger tax increases will be imposed.

But the bad news does not stop there. A few sentences in a recent Wall Street Journal report on the G-20 summit should prompt increased concern: “President Obama said that next year he would present ‘very difficult choices’ to the country in an effort to meet deficit goals.

The president cited his disappointment with the U.S. tax code. ‘Next year, when I start presenting some very difficult choices to the country, I hope some of these folks who are hollering about deficits and debt step up, ’cause I’m calling their bluff.’”

What does that mean, exactly? Well, no one knows for sure, but it’s a good bet the president — probably through his budget and tax commissions — will present a plan centered on a major, economy altering tax increase.

A value-added tax (VAT) must be considered as a very real possibility, while, as usual, any mention of spending cuts will be window dressing.

The president obviously is waiting to get beyond the November elections, which promise to be bad for Democrats without additional proposed tax increases.

To sum up, government spending is careening out of control; higher income, capital gains, dividend and death taxes seem to be on the way; and further tax increases — perhaps the imposition of a VAT — are in the mix.

How, again, is this spending and taxing policy scenario possibly good for small business?

Raymond Keating is chief economist for the Small Business & Entrepreneurship Council, a group based in Washington, D.C.,  dedicated to protecting small business and promoting entrepreneurship.  Reach Keating through the Web site at www.sbecouncil.org.

The Business Times has served as the definitive source for Grand Junction business news since 1994. The journal offers news, views and advice you can use twice each month in print with daily updates online at www.TheBusinessTimes.com
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Posted by on Aug 27 2010. Filed under Opinion. You can follow any responses to this entry through the RSS 2.0. Both comments and pings are currently closed.

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