ATTENTION, MAIN STREET job creators. The Republican-majority House of Representatives has a deal for you. The Small Business Tax Cut Act has just passed the House on a party-line vote. It would let firms that had 500 or fewer employees in 2011 or 2010 deduct from their taxable income up to 20 percent of their qualifying domestic business income in 2012. Yes, the bill would increase the deficit by $46 billion over the next decade — but Republicans say it will create scads of jobs.
Now, the first thing that needs to be said about this proposal is that it violates a basic tenet of supply-side economics. According to that theory, temporary tax cuts do not promote economic growth. What matters most, according to the theory, are long-term incentives; therefore, businesses are most likely to expand in response to permanent reductions in their marginal tax rates, not one-shot Keynesian rebates or “targeted” deductions. But it’s an election year, and Republicans need a riposte to President Obama’s “Buffett rule,” and so the theory goes out the window.
We’re no supply-siders. But it so happens that there is wide agreement among economists of all stripes that the benefits of “targeted” tax breaks generally don’t exceed their costs. Also, recent economic research casts doubt on the notion that small businesses create more jobs than big ones. A business’s age, not size, matters; start-ups tend to create jobs more rapidly than established firms.
Yet the GOP’s bill is in no way targeted to start-ups. To the contrary, brand-new businesses tend to have lower profits, or none at all, which means they benefit less from deductions. According to the Tax Policy Center, 49 percent of the benefits would go to tax filers with $1 million or more in income — i.e., the bill disproportionately helps those who are already doing well.
No need to worry about how it would work out in practice, though, because obviously the bill is going nowhere in the Democratic-controlled Senate. Someday, Congress may stop posturing about taxes and take on the broad systemic reform the country really needs. But probably not before Election Day.