The Problems with Small Business Tax Credits

February 9, 2010 by  
Filed under Economics

President Obama has recently proposed tax credits for small business that he thinks will create jobs. I think he’s either fooling himself on the merits of the proposal or is just playing for time and PR by introducing “sounds good” legislation that he knows will not make it through Congress. I work for and partly own a small business. Let’s look at the realities of what Obama is asking for.

First, Obama wants to cut small businesses a break on taxation of capital gains. Excuse me, but how many small businesses engage in the buying and selling of capital assets for profit? This is a meaningless proposal because it will affect so few businesses.

Second, Obama wants to extend a tax credit to small businesses that hire people. This proposal is similar to one rejected by Congress last year because it would be so difficult to implement and enforce fairly. For example, could a company hire two employees this month, receive the credit, then fire three employees next month? How about firing two this month and re-hiring them next month? Or firing a $60,000 employee and replacing him with two $30,000 employees. You can imagine how all of this could be abused.

Third, isn’t such a credit unfair to those small businesses who struggled to retain loyal employees through the bad times while favoring small business owners who swung the axe as soon as things went south?

Fourth, most small corporations pay little or no corporate income taxes, as they pay out all of their “profits” to the owners as deductible salary and bonuses. This means that either they will not benefit from the credit or this will be a refundable tax credit. If the latter, then the government is basically directly subsidizing the salary of new hires. How long can that last?

Fifth, if a small business doesn’t have the revenue to support a new hire, what good is a tax credit going to do? Not enough to cause that business to pull the trigger on new hiring.

Obama should look instead at cutting payroll taxes. A recent Congressional Budget Office analysis concludes that this would create jobs. What he is proposing is more fluff than substance.

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8 Responses to “The Problems with Small Business Tax Credits”
  1. Evan says:

    “I think he’s either fooling himself on the merits of the proposal or is just playing for time and PR by introducing “sounds good” legislation that he knows will not make it through Congress”

    ummmm TML, can you tell me when he hasn’t proposed sounds good legislation without really thing about the consequences.

  2. dwhite2762 says:

    How about the party of “NO” make some laws that stimulate the economy. When has THAT happened recently?

  3. Doug says:

    As a small business owner, if the gov’t wants to enhance small business activity, they could focus on reducing the cost of hiring/retaining employees: worker’s comp, payroll taxes, insurance costs, cost of good background checks, HSA costs, tax record keeping, licensing, etc.
    No small business owner I know of can take advantage of the cap gains tax.

  4. averagejoe says:

    TML…when will YOU be running for prez? You have my vote! You’re someone who actually speaks ‘common sense’.

    Note to dwhite-the democrats have been a majority for the past year and the last 2 years of the Bush admin. (that makes 3 years) There is no such party of ‘NO’. Dems could have gotten whatever they wanted passed. The conflict is not between the repubs and dems. It’s between the dems and the progressive (liberal left loon) dems.

  5. MasterPo says:

    Points 2, 4 and 5 are really good.

    I’ll also add – When Obama *PROMISES* that cap&trade WILL **DOUBLE** electric rates what business owner in their sane mind would hire under such a threat?!

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