Why small business tax cuts do not create many jobs

Employee

Tax cuts intended to create jobs may not help businesses that do not have employees. Image: Flickr / 4nitsirk / CC-BY-SA

It’s a political refrain that gets repeated time and time again: small businesses create jobs. A bill making its way through Congress would help cut taxes to those small businesses, but the number of jobs created by the bill is under heavy dispute.

The small business tax cut

A bill scheduled for vote on the House floor today would help cut taxes on small businesses. The one-year measure is estimated by the Congressional Budget Office to cost $46 billion out of the federal budget. The bill would allow small business owners to deduct 20 percent of their business income directly off of their taxes, effectively lowering their income bracket by 20 percent. The idea is that businesses would use these tax savings as a way to finance another employee or expand their businesses. some GOP groups claim that the savings would help businesses hire an additional 40,000 over the one year the tax cut is in place.

Defining a small business

According to the Small Business Administration, a “small business” is any business that has fewer than 500 employees. About 28 million businesses fit into this definition, 99.9 percent of all businesses in the United States. According to 2007 Census data, the vast majority of all small businesses in the United States, about 20 million, have no employees at all; they are owner-operated businesses. Many advocacy groups have addressed this by creating the classification of microbusiness, which separates firms with 499 employees from owner-operator businesses. The government does not recognize the difference between a small business and a microbusiness, though a formula does allow some firms larger than 500 employees to be considered a “small business” in some low-competition markets.

[This tax cut will provide a small amount of money, similar to a personal loan, to many business owners]

The true effect of tax cuts

Though the small business tax cut bill winding its way through Congress is intended to increase hiring by cutting taxes on small business owners, the effect may be very small. Most owner-operators do not make a huge profit on their businesses, and a 20 percent cut on taxes that are already in one of the lowest tax brackets will have an effect of a few hundred dollars. While that extra money can be useful in building up a business, hiring an employee costs several thousand dollars, even if the employee is working only part-time. That means for most small business owners, these proposed tax cuts will not mean new employees or even new equipment, they will mean a few hundred extra dollars to reinvest in the business.

Sources

WBUR
Census.gov
SBA.gov

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