Tax hikes and jobs: The whole story

The battle over taxes and job creation is heating up in Washington.

NEW YORK (CNNMoney) — Raise taxes on the rich, and you’ll put the nation’s “job creators” at risk.

It’s a ubiquitous Republican talking point: Congress must keep the top two rates at 33% and 35% — instead of 36% and 39.6% as President Obama wants.

The argument: Many small businesses file taxes under the individual tax code.

But while that argument makes for a good bumper sticker, it’s a misleading simplification of a complex policy issue.

“The Republican claim that this is a tax increase on a large fraction of employers is just not true,” said Howard Gleckman, a resident fellow at the Urban Institute.

In sharp contrast to the rhetoric, current data suggests small businesses don’t create an outsized number of jobs, very few small business owners fall into the top two tax brackets, and tax cuts for small businesses are ineffective stimulus measures.

Relatively few small businesses would be affected: Extending the tax cuts for top earners for another decade would come at a significant cost — nearly $1 trillion in added debt over a decade.

But small businesses wouldn’t see much of that cash.

Only 2.5% to 3.5% of small businesses would be affected by an increase in those two rates, according to the nonpartisan Congressional Research Service.

Instead, almost all individuals who report business income fall into lower tax brackets, where both Democrats and Republicans want to retain current rates.

And some of the businesses that do fall into the top two brackets are not what Americans typically consider “small businesses.” They are doctors and lawyers and members of limited partnerships, not mom-and-pop store owners.

According to CRS, 80% of tax cuts in the top two brackets would go to non-businesses.

Small businesses are not job-creation heavyweights: It’s the central premise of the argument to keep the current rates: Small businesses drive hiring. While frequently cited in political circles, it’s not quite true.

First off, definitions of what exactly constitutes a small business vary greatly.

But a new report from the Treasury Department found that only 20% of small businesses in 2007 even had employees.

“It turns out most of the firms those politicians define as small businesses don’t hire or invest very much at all,” Gleckman wrote in a blog post on the subject.

Of course, small businesses do create a lot of jobs — but at the same time, new ventures fail at a prodigious rate — wiping out jobs just as fast as they are created.

According to CRS, “small businesses contribute only slightly more jobs that other firms relative to their employment share.”

And a smaller, very specific, subset of that group — startups — drive most of the job growth. Established firms, even small ones, hire far fewer workers.

Tax cuts aren’t powerful stimulus: Would an increase in tax rates mean fewer jobs are created? Maybe not.

“The primary thing standing in the way of hiring is not taxes, it’s lack of demand in the economy,” said Leonard Burman, a professor at Syracuse University’s Maxwell School.

Over the long run, most research suggests modest tax rate increases “would have little negative impact on long-term economic growth and job creation,” according to CRS.

Alan Viard, a resident scholar at the conservative American Enterprise Institute, said that tax cuts do little to stimulate aggregate demand in the economy. But, he added, higher marginal rates would cut into some firms’ incentive to earn additional income.

Still, the rhetoric? Unconvincing.

“Politicians have this irrational romanticization of small businesses,” Viard said. “There are no economic grounds why a small firm is better than a large firm.” To top of page

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