SK: There is too much noise and variables in an economy for me to present certain proof that a very small increase in the marginal tax brackets will “damage” the economy. However, absence of proof is not evidence of absence.
I am confident, though, that these increases will destroy some small businesses at the margins, costing jobs. For example, there is this recent business study showing the following (from a tax law professor’s site):
“Consistent with the growing tax burden on small-business owners, as well as the growing body of evidence linking higher tax burden with limited entrepreneurial growth and higher closure rates, this study has found that tax problems constitute an important reason for bankruptcy filings for a sizable number of entrepreneurs. Interestingly, those entrepreneurs that attribute their business collapse to tax problems do not come from disadvantageous background. Instead, the average entrepreneur in the bankruptcy sample that has faulted tax problems for his financial woes was typically older male, white, native-born, well-educated and an experienced business owner. Nonetheless, the typical entrepreneur with tax problem in the bankruptcy sample was facing enormously higher debt burden with more than five times as much debts as other entrepreneurs in the bankruptcy sample.
While this study confirmed the prevalence of tax problems as a cause of business failure, it did not ascertain the exact nature of the tax problems faced by many of these entrepreneurs in bankruptcy. Future research might explore the pervasiveness and the nature of tax debts among bankruptcy petitioners; ascertain the amount of tax debt bankruptcy entrepreneurs typically report at the time of bankruptcy filing; identify the tax burden at the time of bankruptcy filing relative to outstanding debt and income of the petitioners; and determine the characteristics of bankruptcy petitioners that tend to report tax obligations.”
Perhaps you experienced a survivor bias in your experience, dealing with well capitalized and healthy corps that could afford to higher a business advisor?
So, whether it is real or imagined, it does look like this study does confirm an association with taxes and bankruptcy, at least businesses at the margins that had high levels of debt, leverage, nominal profits, etc. And I know a lot of businesses in that situation. Also, of course, it doesn’t show how much new business is hampered by people who “don’t want to deal with the taxes and regulation,” whether LLC fees, business franchise tax, permits, licenses, required insurance, ordinary income tax, etc.
Besides, my original point, as you may remember, was that a simple-then-and-now-comparison with respect to tax rates is not instructive. We all know the AMT has crept up, as well. Throw in higher state taxes, as in CA, and you have a recipe for disaster with a little cap and trade for flavoring.
