We’re not succumbing to the dark side

House Majority Leader Eric Cantor has a plan that is scheduled to be taken up by the House tomorrow.  On the surface it looks like one of those political gimmicks that partisans like to feign outrange about.

Mr. Cantor proposes that small businesses with pass-through income (S-Corp, partnership) should have their 2012 tax obligation on business profit reduced by 20% if they have a non-owner/director employee.  With that, he insists, we will inspire small business owners to hire more workers, which will justify the added $46 billion to our national debt over 10 years.

The proposal probably sounds like a great job creation plan to the public but it is laughable to most real small business owners. 

This tax reduction would average about $6500 for a small business according to the Joint Committee on Taxation.  But that figure is the average that 99% of small businesses would get.  The wealthiest 1% of small business owners will receive 60% of the tax benefits according to the Tax Policy Center.  The Urban-Brookings Tax Policy Center estimates that nearly half of this $46 billion tax cut will go to people with incomes over $1 million a year.

So are real small businesses going to hire a new employee with their one-time only tax cut?  Not likely.

Small business owners don’t make hiring decisions based on personal income.  Hiring decisions are based on demand for goods and services.  If the demand does not increase, a slight increase of income to the owner will not make them hire unnecessary workers that will add much more costs to their business.

What will small business owners do with any “windfall”?  All the ones I’ve talked to over the last few days simply say they will put it into a retirement plan or use the money in some other personal way but not create a job.

But there are even more insidious consequences if this ineffective gimmick became law other than the obvious partisan victory and funneling more money to the wealthiest Americans.   Adding more to the debt will gin up more calls to cut non-military programs—the exact programs, like investing in infrastructure to create jobs and workforce development, which small businesses need for a healthy Main Street economy. 

Just as bad would be co-opting small business owners to be no better than multinational corporations—only being interested in increasing profit by not paying their fair share of taxes rather than investing in a strong, sustainable local and national economy.  That is a path small business owners can’t take because that is not who we are.