Obama's Taxing Budget

Ray Keating

Since releasing his budget plan on February 1, we've heard a great deal about how President Obama is trying to help small business.

Unfortunately, that is overwhelmingly not the case on the tax front. Indeed, the list of tax measures that will explicitly hurt entrepreneurs and their employees, as well as the investors that supply capital to small businesses, is rather daunting.

Consider the following sample from the President's budget plan:

• The two top personal income tax rates would be increased from 33 percent and 35 percent to 36 percent and 39.6 percent, respectively. This tax increase would hit the bottom line of more than 90 percent of U.S. businesses, as they are not C Corporations and therefore pay the personal income tax; diminish incentives for entrepreneurship; and reduce the resources available for private-sector investment, saving and consumption.

• The top capital gains and dividends tax rate of 15 percent for individuals would be increased to 20 percent. If the President wants to get entrepreneurship and investment in business moving ahead, then diminishing the potential returns on such risk taking by hiking capital gains and dividends tax rates makes no sense whatsoever.

• Also on capital gains taxes, one of the big applause lines the President offers is a call to eliminate capital gains taxes on investments in small businesses. Indeed, that sounds great. Unfortunately, this turns out to be a very narrow, limited measure, and therefore, is of little or no value.

The exclusion would only be available for certain kinds of stock (excluding S Corps.) bought during an original issue after February 2009, and held for at least five years. In addition, the business can only be active in certain industries, and the returns available for capital gains exclusion are limited.

This is about political spin, rather than substantive tax policy.

• Under current law, the death tax is scheduled to expire this year, and then return in 2011 with a top tax rate of 55 percent (60 percent for certain estates) and a $1 million exemption level. The Obama budget calls for maintaining the death tax at its 2009 levels, with a top rate of 45 percent and $3.5 million exemption. However, the elimination of this anti-family business, anti-investment, anti-jobs and grossly unfair tax simply should be made permanent.

• On the small business expensing front, the President's proposal is far less robust than what the economy needs. Under current law, the $250,000 expensing level (phase out level at $800,000 of investment) in effect for 2008 and 2009 would fall to $125,000 (phase out at $500,000) in 2010, and in subsequent years, to $25,000 (with a $200,000 phase out). The President calls for extending the 2008/2009 levels for 2010, and then making the $125,000 expensing level permanent.

At the very least, the $250,000 expensing amount should be made permanent. The best case would allow all businesses to choose between expensing their capital expenditures and using depreciation schedules.

• At the end of 1995, four taxes used to finance the Superfund program expired - an excise tax on domestic crude oil and imported petroleum products; an excise tax on chemicals; an excise tax on imported materials used to produce various chemicals; and an added 0.12 percent income tax on corporations. The President is calling for re-imposing these levies. That means both increased costs for businesses and consumers, and the perpetuation of a Superfund program that needs to be overhauled and re-thought.

• The President's budget calls for eliminating the last-in, first-out (LIFO) method of valuing inventory and goods sold. This is a simple case of eliminating a legitimate accounting method so that the federal government can pull in more revenues. This would hit many energy firms.

• In addition, assorted tax incentives for investment in fossil fuel exploration, development and production would be eliminated under the President's plan. Since such measures would not be accompanied by a lowering of tax rates or an expansion of broadbased investment incentives, these measures will translate into less energy development and higher energy costs.

One of the very few clear positives among the Obama tax proposals would be making permanent the 20 percent research and experimentation tax credit, which expired at the end of December 2009.

The U.S. economy relies on entrepreneurship, business and investment to drive our economy and job creation forward. Unfortunately, President Obama's tax agenda is all about raising taxes on these critical endeavors. If made law, such measures will serve as additional governmental drags on economic recovery and growth.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.
Copyright 2010 Small Business & Entrepreneurship Council. All Rights Reserved.

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