Proposed dirty dozen tax hikes prove pro-business talk is cheap

A dramatic shift in rhetoric emanating from the Barack Obama White House occurred after the November elections. Before November, anti-business talk and policies reigned. Since the election, President Obama has worked to shift the administration’s tone towards business.

As evident by the president’s budget proposal, though, political talk turns out, once again, to be quite cheap in our nation’s capital.

The 2012 budget plan does nothing substantive to reduce the size of government after unprecedented growth and actually includes assorted tax increases that will hurt business and the economy.

On the spending side, after a historic increase in outlays of 40 percent over four years, the budget would provide a small, one-year reduction (2.4 percent) in spending during 2012. But then federal spending would quickly resume its growth.

As a share of the economy, spending would remain at unprecedented levels over an extended period of time — after hitting 25 percent of GDP in 2009 and 23.8 percent in 2010, federal outlays would equal 25.3 percent of GDP this year (the highest level since World War II), 23.6 percent in 2012, 22.5 percent in 2013, 22.4 percent in 2014, 22.3 percent in 2015 and then back up to 22.6 percent in 2016.

This long, unprecedented period of high spending promises to loom as a big negative over the economy. By the way, during the late Clinton and early Bush years, outlays ranged between 18.2 percent and 19.7 percent of GDP.

Perhaps even more surprising than the budget’s call for big spending are the tax increases. The following could be called Obama’s dirty dozen tax increases. Keep in mind, though, that this is far from an exhaustive list in terms of measures that would increase taxes and costs under the Obama budget:

Higher personal income taxes on upper income earners — many of which, of course, are entrepreneurs — starting in 2013. The top tax rates would increase from 33 percent to

36 percent and from 35 percent to 39.6 percent. Since most businesses pay personal income tax rather than corporate income tax, this is a direct hit to the bottom line of entrepreneurs.

In addition, a variety of itemized deductions would be reduced for upper-income earners, which translates into an estimated

10-year tax increase of $322 billion.

An increase in the individual capital gains and dividends tax rate from 15 percent to 20 percent in 2013 for single taxpayers earning more than $200,000 and married taxpayers with incomes topping $250,000. Given the central role of risk taking — entrepreneurship and investment — to economic growth and job creation, this is an egregiously anti-growth tax increase.

An increase in the death tax, with the top rate increasing from 35 percent to 45 percent in 2013. In addition, the exemption level would be reduced from $5 million to

$3.5 million. Recall that the death tax was eliminated for 2010. The only way to justify the existence of a death tax is envy, as it makes no economic sense. It discourages investment, diverts resources to tax avoidance endeavors and reduces growth and jobs. When all costs are considered, the death tax nets the government no positive revenues.

A permanent extension of the unemployment insurance surtax at 0.8 percent. The surtax is currently scheduled to decline to 0.6 percent after June 30, 2011. A higher tax on labor simply translates into increased costs and reduced incentives for hiring.

A new fee on financial institutions. While labeled a “financial crisis responsibility fee,” this is about government irresponsibility. The economic reality is that this tax would divert resources away from private credit markets and to government. It is expected to drain $30 billion over a decade.

Taxes to support the Superfund program. These levies were allowed to expire at the end of 1995. The proposed taxes are: an excise tax of 9.7 cents per barrel on crude oil and imported petroleum products, an excise tax on hazardous chemicals at rates that vary from 22 cents to $4.87 per ton, an excise tax on imported substances that use listed hazardous chemicals as a feedstock and a corporate environmental income tax imposed at a rate of 0.12 percent on the amount by which the modified AMT income of a corporation exceeds $2 million. These taxes would simply raise costs for the private sector while providing more funds for a program that long has been in need of a complete rethinking.

Increases in the excise tax on domestic crude oil and imported petroleum products from 8 cents per barrel to 9 cents starting 2012 and to 10 cents beginning in 2016. The obvious effect here is to raise the costs on energy — including prices at the pump — for consumers and small businesses.

Repeal of the “last in, first out,” or LIFO, method of inventory accounting. This unwarranted repeal of a standard accounting practice would raise taxes by $21 billion over five years and $53 billion over a decade — with energy firms getting hit hard. Again, that means increased energy costs.

Assorted “reforms” to the U.S. international tax system that would increase taxes over five years by $65 billion and over a decade by $129 billion. An increased U.S. tax burden on doing business internationally is hardly the way to make America a more competitive place to do business. This certainly runs contrary to some of the rhetoric we’ve heard from the administration about making corporate taxation simpler and more competitive.

Various reforms in how life insurance is taxed, with the result being a $3.7 billion five-year tax increase and $14 billion tax hike over 10 years.

An additional set of tax increases directed at fossil-fuel-produced energy — including repealing the expensing of certain drilling costs and repealing a domestic manufacturing deduction — that tallies up to a five-year tax hike of $23 billion and

$44 billion over 10 years. Coal production also is targeted for an added $2.6 billion in tax increases over a decade. So, policy would push up energy costs still further.

While the president says that he favors repealing the 1099 mandate in the health care reform law requiring businesses to file a 1099 form for all vendors paid at least $600, the budget plan calls for advancing this in another guise. Contractors receiving payments of $600 or more in a calendar year from a particular business could require the business to withhold a flat rate percentage of their gross payments. This obviously would increase tax compliance costs for many businesses.

The federal budget is the main vehicle for directing public policy. It’s evident from what the president has put forth that any pro-business, pro-entrepreneurship rhetoric heard from the White House has little, if any, substance behind it.

Raymond Keating
Raymond Keating

Raymond Keating is chief economist for the Small Business & Entrepreneurship Council, an advocacy, research and training organization based in Washington, D.C., and established to protect small businesses and promote entrepreneurship. Reach Keating through the website at