The Problems with Small Business Tax Credits
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.
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.