Small Business, Jobs, and the Tax Cut Debate

Treasury Secretary Timothy Geithner was the featured speaker in an August 4 panel that focused in part on how tax cuts would affect small businesses and their role in job creation.

John Podesta of the Center for American Progress introduced the panel, noting that a policy of continuing tax cuts to the top 2 percent of Americans would cost $700 billion and was ranked last among eleven policy options analyzed by the Congressional Budget Office for their effects on output and employment.

Douglas Holtz-Eakin, President of the American Action Forum, countered that households with their current badly damaged household balance sheets are not in a position to be powering the economy forward. Data from the most recent ADP employment report show that most new jobs are coming from businesses with fewer than 500 employees, so raising marginal tax rates places jobs at risk, and is a step in the wrong direction, he said.

Secretary Geithner advocated for extending tax cuts for the middle class—households earning $250,000 or less—while allowing the 2001 and 2003 tax cuts for the top-earning 2 percent of Americans, earning $800,000 on average, to expire. Extending tax cuts for the middle class would target economic stimulus to Americans who are more likely to spend the money, he said, while allowing tax cuts for the top 2 percent to expire would have no effect on more than 97 percent of small businesses. In the context of the president’s proposal to freeze non-security discretionary spending, “asking the top earners in our society to forgo an extension of recent tax cuts has to be part of the compact that restores fiscal responsibility in Washington.” He also advocated passage of the Small Business Jobs Act currently before the Congress.

In response, Holtz-Eakin noted that one of the traditional objectives of tax policy is to have a tax code that does not discriminate unfairly as to forms or scales of business, and to draw a line that says you’re small, you’re large, and to treat them differently is at odds with such a tax policy.

It’s an interesting debate. What really does stimulate small business jobs growth? The issues and answers are complex, but stay tuned—Advocacy is looking at these questions in a variety of formats and will be sponsoring an October symposium on high-impact entrepreneurship.

Kathryn Tobias, Senior Editor

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