There are lots of issues related to the extension of tax cuts. Here’s one that I have not seen discussed in the public arena.
The strongest argument offered by those supporting tax cuts for the wealthy is that small businesses will lose the money to hire middle-class workers. This argument seems persuasive, but it is totally wrong.
If a small business makes a profit, the owner has two basic choices – (1) take that money out of the business in the form of a distribution (salary or dividend) to themselves, or (2) hire additional people.
If they take the profit as a distribution to themselves, it is subject to taxation. The debate in Washington right now is whether to tax these distributions at the 2000 tax rate of 39.6% or the 2010 tax rate of 35%. By the way, these rates assume their total taxable income is more than $375,000 … if their salary is below $250,000, everyone agrees that their tax rate should remain at the lower level of 2010.
If they decide to use the profit to hire additional people, then the profit is NOT TAXED. All monies used to pay worker salaries are now and always have been a deductible expense and, therefore, not subject to taxation.
When businesses use their profits to hire additional workers – THAT HELPS AMERICA!
The Republican argument, though attractive on its face, does not hold up under basic, longtime tax law. The ONLY result of their proposal is to encourage wealthy small businesspeople to simply pay themselves larger salaries at a lower tax rate – not grow our economy. How does that help America?