Small Businesses and Economists Agree: Higher Taxes is a Bad Idea

Dec 12, 2012

Mechanic Joe Donarski cleans a rim as he prepares to mount a new tire at Princeton Tire Service in Princeton, IL. Photographer: Daniel Acker/Bloomberg.

The threat of higher taxes from the fiscal cliff is creating consternation with small business owners and causing economists to wave red warning flags.

A survey of U.S. Chamber small business members found that impending tax increases will slow hiring and stall business investment and expansion:

  • Is the impending fiscal cliff of tax hikes adversely impacting your business?   Yes – 83%
  • Will you reduce your work force?  Yes – 59%
  • Will you forgo certain capital investments/expenditures?  Yes – 79%
  • Will you forgo plans for expansion?  Yes – 73%

The worries small business owners expressed are just as telling as these numbers.

Mark Wilkerson, Overland Park, KS:

We are not willing to release capital for equipment, people, or other assets until we know what the Federal Government will do regarding, Taxes, Spending, and Sequestration.

Elmira Perrin, Southern Electronics Supply, New Orleans, LA:

The current economic conditions make it difficult to stay profitable. We have already downsized staff causing others to work harder. Any tax increase will be dealt with by further decreasing expenses. This will mean layoffs and cause us to not make capital expenditures for new equipment and software.

Lee Anne Madersky, PSA, Somers, CT:

We are doing year-end tax planning in a vacuum.  We are in a position to hire and have a need to do so but don't know if our customer base will retract as a result of the ultimate deal or no deal struck.

Darrik Spaulding, Virginia Sentinel, inc., Lynchburg, VA:

We have frozen hiring and all unnecessary spending until the fiscal cliff issue gets resolved and the economic impact is determined.

Mike Olson, Wyoming Steel Fabricators and Erectors Inc., Cheyenne, WY:

I am in a position to expand my business and purchase more equipment and hire more employees. However, I am holding off to see what happens. If taxes go up I won't expand my business. It is ludicrous to exert all the effort time and capital to expand my business if the reward is less.

Michael Budde, Boeckerman Enterprises INC., Apple Valley, MN:

We are an S Corp so our business and personal returns mix together. We have two restaurants with 60 employees each. It takes a large amount of capital to keep both stores running. We could never live on the profits of just our businesses. My wife is employed outside our business so we can make a living raising 4 children. We would not have very much if it was not for her being employed. So now you add my wife's salary along with mine and pile the business on top of that and we are going to take a big hit [on] next year taxes on money that we do not actually have!!!

Laura Neubert, LaDanCo, LLC, Shreveport, LA:

The uncertainty of the tax hikes, current debt level, and the general unwillingness of Congress to work together has resulted in no growth of my business in the past 18 months, and no potential growth of my business for at least the next 18 months.  I am afraid that I will reach a point that it is no longer an advantage for me to work for myself. 

These views are emblematic of increased pessimism among small business owners generally. The National Federation of Independent Business (NFIB) Small Business Optimism Index fell to a level rarely seen in the history of the monthly index.

NFIB chief economist Bill Dunkelberg said, “Nearly half of owners are now certain that things will be worse next year than they are now.” Worry about taxes is tied with poor sales as the number one most important problem.

For Neil Irvin at Wonkblog, the plunge in the NFIB index is evidence that “the possibility of huge tax hikes and spending cuts on Jan. 1 is creeping into the psychology of those making business decisions.”

Economists back up business fears. Lee Ohanian and Nobel Prize-winner Edward Prescott write in the Wall Street Journal, “[R]aising tax rates further will significantly reduce U.S. economic activity.” Also, a group of over 180 economists warned Congress that tax increases “would likely slow or reverse our nation's fragile economic recovery and undermine long-term growth.”

To ease these fears, Washington should first, extend current tax rates as well as expired and expiring tax provisions and find alternative cuts to avoid sequestration. After that, they need to pass comprehensive, pro-growth tax reform and spending reforms that address entitlement spending.

Both those on the front lines of our struggling economy, small business owners, and trained economic observers agree that raising taxes is bad news for the economy.

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