THE GOVERNMENT’S BOTTOM LINE: A CASE STUDY IN UNINTENDED CONSEQUENCES

Here’s more on issue oversimplification, my biggest political pet peeve, in a more specific policy context. Warning: now entering somewhat-more-partisan-land.

In this next round of congressional budget talks, we can expect to hear more of the same, particularly on the tax policy front. The left is predominantly unwilling to come to the negotiating table if tax revenue isn’t on it. Unfortunately, their talking points often only tackle the hopelessly vague threshold that is the federal government’s bottom line, a la “we should tax the wealthy, because revenue.” Wealth is a general thing, theoretically possessed by a homogeneous group of upper class Americans with personal income to spare. They largely make their money the same way, and what they make is almost always characterized as income, not capital, when the distinction is a crucial one.

This one-dimensional view of American wealth brings me to another vexatious Democratic communications tactic: invoking math.

Under-taxed homogeneous group of upper class Americans + higher taxes on the wealthy = reduced federal budget deficit, a necessary step toward income equality, sufficient funds for vital government programs, etc.

It can’t be that simple, and it isn’t. However, many on the left are guilty of depicting the U.S. resources pie and its proprietors in a static way that totally forsakes the complexity of income distribution and how Americans make their money. The “wealthy” are a diverse group. Ignoring their diversity is a lazy communications strategy, and indiscriminately relying on them as a collective target for government financing is bad policy.

What’s worse, the right is responding to this superficial rhetoric with more superficial rhetoric. Republicans claim the exact reverse of their Democratic counterparts: any and all tax increases will hit capital, hurting American small businesses and removing from employers the incentive and ability to create jobs. Sometimes that’s true, sometimes it’s not. Using the argument arbitrarily does damage to the important case conservatives need to make.

Here’s what I think.

Much has been said about the absurdity of cutting taxes for “households” in the higher income brackets. Again, it seems an obvious choice. The federal government is short on revenue, and America’s highest earning “households” make the best candidates for higher tax rates. However, there is a serious reality hidden behind the “tax cuts for the wealthy” rhetoric. Seventy-five percent of all businesses in the United States are flow-through enterprises that pay an income tax rate on earnings. One million employers and 50 percent of all small business capital fall into the Obama administration’s arbitrary “$250,000 and above” wealth category perfectly positioned for another tax increase. These employers aren’t investors paying 20 percent on their capital gains, nor are they multinational corporations with access to legal tax loopholes for foreign-earned income, nor are they independently wealthy men and women who aren’t responsible for compensating employees. Despite this, I’ve taken to calling them “households,” because that’s how the Internal Revenue Service views them for tax purposes.

Small and mid-market employers who find themselves in this predicament, paying high personal income taxes on what is really business capital, have two cases to make simultaneously:

Their first argument is political in nature, structured to outmaneuver the vague and unfair generalizations I’ve already addressed. Those who see indiscriminate income tax increases as a necessary conduit to additional revenue often cite “fairness” as their cause and a “fair share” as their objective. Small and mid-market business owners are currently subject to varying rates for payroll taxes, employee benefits, workers’ compensation, unemployment taxes, and state and local taxes, and the top federal tax rate for S corporations climbed from 35 percent to 39.6 percent last January. Should the government take approximately 50 percent in taxes and fees from some of America’s most successful job creators? Is that fair? Probably not.

Perhaps the more convincing argument for the small and mid-market business community in the context of a slow-growing U.S. job market is an economic one. According to the Small Business Administration, small businesses are responsible for 9.8 million of the 15 million jobs created between 1993 and 2009. 9.8 million is equivalent to 65 percent, nearly seven in 10, of all jobs created in the 1990s and 2000s. Still, the unemployment rate in the United States has remained stubbornly high, and frustrated Americans are leaving the work force in record numbers. While many are wary about tying tax cuts to economic growth, it is difficult to defend a federal tax system that expects the most from employers, especially at a time of stubbornly low employment. Is better tax policy an incentive for job creation? Perhaps. Is bad tax policy and a disproportionate financial burden on America’s job creators a disincentive for job creation? Absolutely.

I understand that these issues are complicated, and explaining them in a way that opens the door to digestible policy solutions is no small task. But lazy and shortsighted definitions will always yield inappropriate and ineffective policies – the benefits of elevating political discourse far outweigh the costs, if there are any costs at all. Parties to future budget negotiations and tax reform deliberations have to recognize complexity before they jump to take more from a group already financing government with one hand and employing a sizable population of Americans with the other.

And so, in the future, elected officials and candidates for public office need to stop coming to their press conferences armed with cop-outs like, “The wealthy don’t pay their fair share.” Many of them do, on top of the fair shares of dozens of other people. The perseverance of employers is vital to U.S. economic sustainability. Belittling their contributions by denigrating a figure on their income tax returns in order to shore up support for more revenue won’t do much to inspire them at a moment when their country needs them most. Taxing employers has consequences.

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