Let me start by saying Smallbizlabs: (1) is pro-business; (2) thinks lower taxes are better than higher taxes; and, (3) prefers a smaller government. We're also non-partisan, which means we don't let politics influence our research.
Please keep these in mind as you read that our work suggests that raising taxes on those with substantial incomes (those with AGI's above $250k) will not have a major impact on small business job creation. Here's the short version why:
1. High growth small businesses are the major job creators: Lots of research shows that high growth young firms - often referred to as gazelles - are the major source of net new jobs in the U.S. Most of these firms are C corporations. This means they don't pass through their profits/losses to their owners or managers. Because of this, personal income tax rates have little to no impact on their hiring decisions.
Also, while the focus of this article is on small businesses it's important to note that medium and large businesses employ over half of the private workforce. These companies are almost all C corporations, so their hiring decisions are also not impacted by personal tax rates.
2. Repealing the Bush tax cuts for those making more than $250k would have a relatively minor impact on hiring decisions: Let's take an example of a small business owner that makes $500,000 per year. By the way, less than 1% of small business owners make $500k or more.
Raising the marginal tax rate 3% for the amount over $250k means a small business owner making $500k would pay roughly $7500 more in taxes.
Small business hiring decision making is a complex process, but at a simple level it comes down to whether or not a new employees expected contribution exceeds the marginal cost of employment. While $7500 is nothing to sneeze at, it's also a relatively small amount compared to the total cost of hiring a single new employee.
3. Many of the small business owners that make more than $500k a year own businesses that tend not grow in terms of employment. Many professional services firms (doctors, lawyers, etc.) fall into this category as do many financial services firms (hedge funds, money mangers, etc.) and real estate investment firms. Small changes in tax rates will not have a major impact on hiring at these firms.
Because we're non-partisan we're leaving it to others to do decide whether or not raising taxes on high earners makes sense for the country.
But the bottom line is few true job creators would be impacted by a 2-3% increase in marginal tax rates for those making over $250k. For those impacted, we think the effect on job creation would be modest.