This week, the House Ways and Means Committee reported H.R. 9, the Small Business Tax Cut Act, which would give every business in the United States with fewer than 500 employees a deduction equal to 20 percent of its gross receipts.
No economic rationale was provided for this legislation. I could find no analyses supporting it, even among Republican-oriented think tanks such as the Heritage Foundation. It appears to be designed primarily to give Republicans a talking point to use on the campaign trail. They will assert that because small businesses create most of the jobs in America, any measure that reduces their taxes will per se increase jobs.
This is in keeping with the strategy put forward by Republican pollster Frank Luntz last year to always refer to small businesses as “job creators.”
The reality is that while small businesses do create most of the jobs; most of those that are lost also occur among small businesses.
According to the Federal Reserve Bank of St. Louis, net job creation by small businesses is minuscule. Between 1992 and 2010, businesses with fewer than 500 employees created 2,064,000 jobs, but also lost almost 2 million jobs, for net job creation of just 66,000.
Recent academic research draws a distinction between young small businesses and old ones. Net job creation is much more likely to occur among the former while job losses are more likely to occur among the latter. Thus it is new business startups that one should be encouraging if the goal is job creation.
The Republican plan, however, makes no effort to differentiate between young firms and old firms, those creating jobs or those shedding jobs, those providing necessary goods and services and those that are little more than vanity enterprises. This fact was illustrated in a colloquy between Ways and Means Committee member Rep. Xavier Becerra (D-CA) and Thomas Barthold, chief of staff of the Joint Committee on Taxation, on Wednesday.
BECERRA: My understanding is that Larry Flynt Productions has about 117 employees … would they also qualify for that small business tax cut?
BARTHOLD: … If they are less than 500, yes.
BECERRA: So Paris Hilton Entertainment, which has five employees and is based in Beverly Hills … they qualify for that small business tax cut?
BARTHOLD: Yes they would, sir.
BECERRA: Is there a requirement that you create jobs?
BARTHOLD: There’s no requirement on the result of the tax relief.
BECERRA: So you don’t have to create a job to get the 20 percent tax cut?
BARTHOLD: That is correct, sir.
BECERRA: What if you fired an employee? Can you still get a tax cut?
BARTHOLD: The simple answer is yes.
BECERRA: What if a company fires an employee in the United States and lays off an American worker and then hires people abroad by outsourcing that job, could that company still qualify for that tax cut?
BARTHOLD: They could still qualify…
BECERRA: Thank you very much, Mr. Barthold.
Flynt is, of course, a famous pornographer and Ms. Hilton is simply famous for being famous. The serious point here is that the term “small business” casts a very wide net. Indeed, since the only test for being a small business under the legislation is the number of employees, the ultimate beneficiaries of the Republican bill will be some large and profitable businesses that just happen to have few employees.