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Emac's Bottom Line

Why Small-Business Owners Feel Besieged

The National Federation of Independent Business released its business optimism index Tuesday, its gauge of confidence among small businesses.

The numbers were fairly dismal.

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The index fell 3 points in June, falling to 91.4, which was far short of the 93.3 expected and the 94.4 reported in May. The decline was broad-based.

Lately, confidence among small businesses has been weak, and can you blame them?Overall, 23% said “weak sales” were their biggest business problem, but that was followed by taxes, at 21%, and “unreasonable regulations and red tape,” at 19%.

The survey was taken before the U.S. Supreme Court’s decision upholding the health-care law and before President Barack Obama announced his latest plan to raise taxes on taxpayers making more than $250,000 a year, which is aimed squarely at small businesses.

The NFIB says it expects health care to show up later as a negative to its numbers when it releases its July survey, meaning small-business confidence could get even worse.

Every small-business owner should sit up and take notice -- and not just because economic policy is on an election-year schedule. The president has long wanted to raise taxes on small businesses, the biggest source of job creation in this country.

Because Democrats consistently believe hiking tax rates on small businesses who create jobs will get Americans working again and will lower the unemployment rate below 8%.

Remember, the president added about $5 trillion in new spending to the federal budget since taking office, equivalent to adding Germany and South Korea. That money went towards spending $825 billion on the president’s stimulus, Wall Street bailouts, automaker bailouts, housing bailouts, green energy bailouts, cash for clunkers, cash for white ware, cash for window sealers.

And still, the country has lost an estimated net 470,000 jobs. So now the president wants taxpayers to foot the bill for the interest costs on all those Treasury bills, notes and bonds issued for his failed experiment.

And that means the president now wants to restore the pre-2001 tax rates for upper brackets, increasing the top marginal income-tax rate to as high as 39.6%. The president also wants to phase out exemptions and deductions for the upper brackets, raising marginal tax rates even higher than the 39.6%.

All these tax hikes are projected to take an estimated $148 billion per year out of the pockets of upper-bracket taxpayers, including small businesses.

Separate from that, the president wants to increase the tax rate on capital gains by one-third, to 20% from 15%. He also proposes to raise dividend taxes to as high as 39.6% from 15% -- on top of the new taxes on investment income included in health reform.

But the president said Monday about his tax hikes hitting small businesses: “The proposal I make today would extend these tax cuts for 97% of all small-business owners in America. In other words, 97% of small businesses fall under the $250,000 threshold.” The president added: “So this isn't about taxing job creators. This is about helping job creators.”

But the president is trying to whip a fast ball by you. This 3% fallacy “is one of the more misleading statements in the long history of economic propaganda,” reported Kevin Hassett and Alan Viard of the American Enterprise Institute, in The Wall Street Journal.

First of all, the 97% the president calls small business owners include people who sell whatever they can on eBay, and then report that income to the IRS as small business income, note Hassett and Viard. They don’t hire workers.

Small businesses typically file as sole proprietorships, partnerships, and what’s known as S corporations. At least three quarters of small businesses file taxes on business income at individual rates, says the NFIB.

Hassett and Viard found that, according to IRS data, a whopping 48% of the net income of small businesses was reported on 2007 tax returns from the very households the president says he wants to protect. Compare 48% to the president’s 3%, and you can see how habitually misleading the White House and Democrats are.

Next, the president is saying just 3% of small businesses will be hit with his tax hikes next year, or some 940,000 taxpayers, according to the Joint Committee on Taxation (JCT).

However, this 3% will account for more than 53% of the $1.3 trillion in small-business income that will be reported on individual tax returns next year, the JCT says.

That means more than $689 billion in small-business income will be hit with higher taxes if the president has his way. The president wants to take out of small business owners’ pockets tens of billions of dollars to pay for his deficit spending that small businesses then won’t have to create jobs.

These JCT estimates have been out there, but the Administration studiously ignores them.

For instance, the JCT has already estimated that in 2011, this 3% the president wants to hit with higher taxes amounted to ”just under 750,000 taxpayers,” adding that “50% of the approximately $1 trillion of aggregate net positive business income will be reported on returns that have a marginal rate of 36 or 39.6%.”

Small businesses create the lion's share of jobs in the U.S. economy; 64% of jobs that are created in this country are created by small business. The Small Business Administration notes that small businesses employ about half of all U.S. workers.

But at least seven out of ten new businesses fail shortly after being founded, partly because small businesses can’t afford high taxes and regulation. Already, high U.S. estate taxes have caused families to sell their businesses, which have reduced the number of small businesses and increased the market share of large corporations, further concentrating wealth in this country, says a study from Duquesne University.

And small businesses will soon be hit with taxes and penalties to pay for the high cost of affordable health care -- on top of rising state and local taxes they must pay.

Small businesses can’t pass along taxes to shareholders, nor to workers if they want to hire talent, nor to consumers who will avoid their pricey goods, nor can they lobby Congress to change the tax code, versus large corporations that can easily do all of that.

And now the president wants to dump more taxes on them.

Every time history repeats itself, the price goes up. Every time elected officials see light at the end of the tunnel, they want more tunnel.

Ask yourself, if government tax and spending produces jobs, why is California’s unemployment rate at 12%? Ask yourself, can you start your car or hire a worker with “fairness,” with “paying your fair share?”

And even the Obama Administration has already conceded that the President’s new taxes would hurt small business. In June 2011, Treasury secretary Timothy Geithner testified to the House Small Business Committee that the Administration believed it had “no alternative” but to raise taxes on small businesses because otherwise “you have to shrink the overall size of government programs.”

Specifically, Geithner said: “We're not doing it because we want to do it, we're doing it because we see no alternative to a balanced approach to reduce our fiscal deficits.” He said if “you're trying to bring our deficits down over time, then you have to do exceptionally deep cuts in benefits for middle-class Americans and you have to shrink the overall size of government programs, things like education, to levels that we could not accept as a country.”

But the Treasury secretary also said the tax hikes on small businesses would be “good for growth.”

However, the U.S. federal tax system is already one of the most progressive systems among 24 countries surveyed by the Organization for Economic Cooperation and Development, (OECD) an international research group.

According to the OECD, the top 10% of U.S. households, including small businesses, pay 45% of the combined personal income and payroll tax revenues while they earn 33.5% of the income.

The top 1% pays 40% of federal tax revenues in 2007, up from 28% in 1988 and 19% in 1980 tax.