CRI News

The historic initiative of President Obama’s first month in office is the Trillion Dollar Stimulus Package passed with little time, oversight, analysis or comprehensive bipartisan perspective. Its probability of success as a stimulus vehicle is also widely in question. It was pretty much accepted that this bill was crafted by Nancy Pelosi with a totally partisan approach to establishing the stimulus plan that is supposed to save our economy. The reason this plan has no Republican support to speak of is that the Republicans were not asked for input and the only bipartisanship was inviting Republicans to the White House for hors d’oerves and cocktails!   As a follow-up to his rushed Stimulus Package, which is primarily composed of spending, not stimulus, is Obama’s claim to cut the expanded deficit in half by the end of his first term as President. He is very specific that he will accomplish this by cutting war spending and increasing taxes on the wealthy. Obama’s approach is based on a liberal ideology that increased government and higher taxes will save our economy, in spite of history, which has shown, time and again, that cuts in spending and lower taxes are the only way to expand our economy and increase revenue to the government.   Obama may be a very intelligent, Harvard educated attorney, but he lacks any business experience and has a total lack of understanding of small business economics and the impact of tax policy on business decisions.   For the handful of super wealthy there is an army of small business entrepreneurs who are the ones that create the vast majority of jobs in this country and grow and stimulate our economy. These entrepreneurs may take a reasonable salary from their business, but being S corporations with K-1 (business) income can put them all well above the $250,000 income level and thrust them into the “wealthy” category. In many cases, the adjusted gross income of these small business entrepreneurs can well exceed a million dollars while their business income may be significantly less than 10% pre-tax and the vast majority of their K-1 income tired up in expanded inventory as they grow their business and in financing payables, since they must pay vendors for material to produce products that they ultimately sell to their customers before they can collect from those customers. It is not uncommon for a small businessman expanding his business to have a paper profit, not cash, and to borrow money to pay the 40% tax liability on the profit of the business.   Currently the tax liability on this incremental income can be in the range of 40%. If the tax liability on the top tax bracket is increased significantly it is possible the government can easily take 50% or 60% of this income as taxes, leaving the small business owner with a smaller share of his profit than the government takes. The means the business owner who aggressively expands his business may need to borrow even more money at times to pay his tax bill.   The answer to the business owner in this situation is to not grow his business and attempt to achieve a steady state over his inventory and a broader spread between his payables and receivables. This means not expanding business, not hiring additional workers, not spending more on capital equipment and basically minimizing risk.   The case of the super wealthy takes a different complexion and has different considerations that also results in a lack of investment in new business, hence a lack of job growth.   When taxes on capital gains are at 15%, wealthy investors may cash out significant sums of money, pay 15% to the government on the earnings of this cashed out investment, while they take the balance and put it to work by investing in high risk business start-ups that have the potential to give them a better than average return on this investment which justifies the risk in spite of the capital gains tax. When these investors make a handful of these types of investments, the probability that some will succeed and justify the risk and investment makes sense. When capital gains are increased to 20 or 25%, that means they must consider that they are now giving the government 20% or 25% of the appreciation of the asset they have cashed in to then invest in a high-risk venture. In many cases, these wealthy investors will decide to not take that additional risk and let their money sit in a more modest but more secure investment vehicle. This results in less money available to small business start ups because the reality is even the best of high risk start-ups have a high probability of failure and are risky investments.   It is not hard to understand, considering the thought process of the entrepreneur, that increasing taxes on the “wealthy” would do nothing but stall our economy and negatively impact growth in jobs, overall GDP and revenue to the government in the form of taxes.   Robert Prybutok is a member of the Caesar Rodney Institute Board of Directors and is President of Polymer Technologies Inc.


Subscribe to receive CRI Policy analysis, updates, and event notifications!