The Millionaire's Tax and Small Business Jobs

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. 

Comments

[tax relief attorney]

The government should understand how to help small businesses drive economic growth and employment because it assesses the impact of tax increases on small business with political rather than economic measures.

[Darrell Glasco]

Thanks for taking the time to respond. I am a subscriber to your blog and have always found your information informative, well thought out and accurate. I will share your comments with my friend as well as encourage him to read your blog.

BTW, I used to bank venture funds at Silicon Valley Bank at noted point #1 to him already.

[Steve]

Darrell: A couple of points:

1. I didn't say most new businesses are C corps, I said most gazelles (high growth firms) are C corps. The main reason for this is most institutional investors (VCs)will only invest in C corps because of the investors protections they provide.

2. There are a lot of S corps - about 3.4 million in the U.S. - and yes they pass through their earnings.

But relatively few C corps generate more than $250,000k in earnings per owner and most S corps do not grow rapidly in terms of hiring employees.

3. For those S corps that do generate more than $250k per owner my point (2) above comes into play. The tax increase is simply not large enough to have a major hiring impact.

Tell your friend we live in the real world (I've founded or cofounded 4 startup businesses) and we're philosophically anti-tax.

But as our tagline says we do fact-based analysis and the numbers simply don't support the idea that a minor increase in marginal rates for high income earners will have a major impact on job creation.

[Darrell Glasco]

I provided comments earlier that I agreed with your article. I liked the article so much that I forwarded to a friend of mine who owns a small business.

I am copying his response below to your article (not mine). If you have time can you provide your thoughts to his comments. I realize in your article that you were talking about Gazelles that produce most of the jobs however the law could have a major impact on small businesses if most are S-Corps. Below are his comments.
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I read this article and found the premise that most new business to be C-Corp a major error. The vast majority of all new Corp. are S-Corps where the income of the Corp and personal income is one and the same. C Corps have not been popular for over 20 yrs. For this group to put out this information shows how little they know of the real world. Over 90% of all new small business that incorporate are S-Corps. The $250,000.00 limit for increased
taxes for an individual with a S-Corp will have a major effect on hiring.

[restaurants in Laguna Philippines]

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 fall into this category as do many financial services firms and real estate investment firms. Small changes in tax rates will not have a major impact on hiring at these firms. I really agree with this. you were right.

Alvin

[Professional Blogger]

Thanks for the insight. Are there enough $1 million or even $5 million plus earners out there to have a significant impact on tax revenue? If so, this may be where the decision starts to make sense...

[Darrell Glasco]

Finally someone has put together some unbiased facts and common sense to the tax debate regarding its impact on small businesses. Unfortunately, facts will not matter to most people who have already made up their minds on this matter.

I enjoy your writing and your subject matter.