President Obama is proposing a $3.8 trillion budget with $1.6 trillion in deficit spending, 42% more spending than the government receives in revenue! And the President has the nerve to say, "It’s time to live within our means." Mindboggling!
The President’s budget makes magical assumptions about the future to protect suddenly reduced deficits in future years. For example, he assumes that the (real) unemployment rate will decline faster than is possible under the false assumption that millions of new jobs will rapidly be created. Obama’s own estimate is for the national debt to exceed $18.6 trillion by 2020. This level of debt, combined with the coming higher interest rates, could bankrupt the country as the interest costs on the debt soar over the next few years, crowding out private-sector borrowing that will be needed for growth.
The worst part of his budget is his plan to add over $2 trillion in new taxes and fees this year (that’s not a typo), with the majority of that coming from small business owners. The President and Congress don’t understand that the economy on Main Street will never recover if he takes another $2 trillion from the private sector; businesses can’t hire if the government is taking away their growth capital (otherwise known as profit).
So, how do we restart the job market with all this government intrusion? Here’s how:
Overall, only cutting taxes on small businesses, expanding credit, and stopping all the proposed regulation (i.e. health care nationalization, cap-and-trade, card check) will restore confidence in the future, which in turn will allow business owners to start investing, spending, and hiring. Cutting spending and taxes to pre-Obama levels is also a critical component to restoring the capital base of private industry so that it has the cash to hire.
Only putting people back to work will generate enough tax revenue to reduce the deficit and pay down the national debt, as evidence by the fact that the higher tax rates have generated 12% less in federal tax receipts. Higher tax rates equals economic decline, which equals lower tax receipts.
So, what are the specifics?
First, restore confidence by announcing that there will be no government takeover of health care, no cap-and-trade, and no card check.
Second, cut the income tax rate on small businesses (which is set to automatically increase next year), which will put more capital into the hands of businesses to invest and hire. Instituting a flat tax would create certainty and predictability that will spur enormous long-term investment and hiring.
Next, cut the capital gains tax, which is also set to increase next year, by one-third. A significant cut of 5% to 10% for two years would motivate business owners and family farms to sell while the tax is low (in particular to sell to their own children), which would spur financial and economic activity for all kinds of service providers, creating demand for more jobs. After that, let the rate settle in at 10% to 15%, which seems to be the sweet spot to maximize tax revenue.
The idea of cutting tax rates significantly is not new. John Kennedy, Ronald Reagan, and Bill Clinton discovered that cuts in the tax rates resulted in economic growth and job creation, and the resulting economic growth generated record-setting tax receipts as more people were working and paying taxes. History has proven that when the government raises tax rates beyond a certain point, tax receipts decline as people stop working more, businesses stop hiring, and taxpayers move to find ways to shelter their income from the taxman.
Next, passing a 100% tax deduction for investment in new plant or equipment would spur manufacturing jobs as businesses take advantage of the deduction. An idea that has worked in Wisconsin is targeted tax credits that would help create a specific new industry (technology) to replace an old one (car manufacturing) in high unemployment areas. (Note: providing a tax credit for general hiring does not create permanent jobs and is impossible to police.) Providing a 25% state tax credit to investors who invest in early-stage technology businesses here in Wisconsin has worked. Not only would the tax credit attract needed capital to a specific futuristic industry, but the companies that benefit would immediately begin hiring and training workers for the new jobs.
Wisconsin’s Act 255 provides a state tax credit for such investments, and I can personally testify to its success. A tech fund I founded attracted 50 investors and $10 million in seed capital. While there are over 120 companies in Wisconsin seeking capital to grow and hire, our fund can only help three to five a year. Just think of the economic impact if every one of those 120 companies had capital to hire and grow!
Washington may have bailed out Wall Street, but recent reports show that Wisconsin is not experiencing a recovery. In fact, all metro areas saw rising unemployment, and 69 of Wisconsin’s 72 counties saw unemployment rise from November to December. One business owner told me that his business is hurting so bad, he is going to have to lay off his own adult children. Small businesses can’t take another hit with higher taxes and fees.
When Obama says that he is only taxing the "rich," he knows that’s not true because small businesses, like S-corporations and limited liability companies, are "pass-through" entities. Their taxes are declared and paid on the owner’s personal tax return. Most small businesses have taxable income in excess of $250,000 because of the combined effect of their personal salary plus business profits.
What the President doesn’t realize is that business owners plow most of their profits back into the company in the form of investments in new equipment and hiring. When Obama taxes away those profits, there’s less capital for hiring and investment. As small business owners know, just because your taxable income exceeds $250,000 doesn’t mean your take home pay is that much.
Small and family-owned businesses (and family farms) are 93% of the businesses in this state. They’re the heart and soul of Wisconsin, but now our government wants to tax them into submission. Let’s cut the tax and regulatory burden on small businesses so that they can recover, start hiring, and grow! Everyone is better off when businesses are successful; class warfare has never led to economic prosperity.
The Obama administration and Congress need to reduce taxes to kick start the economy and breathe life into the private sector, where jobs are born!
Sign up for the free IB Update — your weekly resource for local business news, analysis, voices and the names you need to know. Click here.