Marginal Tax Rates and Small Business
By Dr. Ernest Zampelli, IPR Fellow
Congressional Republicans refuse to consider ending the Bush tax cuts for households with incomes over $250,000 as part of any deficit reduction package. Their intransigence on this issue is rooted in the belief that increasing tax rates on such households is effectively increasing tax rates on small businesses, the alleged engines of job growth and thus, economic growth. In thinking about this argument, I reckoned that if marginal income tax rates were of such great quantitative importance to the growth of small businesses, it should be manifested in the data. Consequently, I went to the Business Dynamics Statistics (BDS) Data Tables prepared by the United States Census Bureau and collected data on the annual entry, exit, and net job creation rates for small business establishments, typically defined as establishments with fewer than 50 employees, over the 1977-2010 time period. For the same period, I collected marginal income tax rate data for households with incomes over $250,000 in constant 2011 U.S. dollars. I tabulated both the lowest and highest marginal tax rates that applied in each year to those households.
In the first graph below, I plot the annual small business entry and exit rates along with the lower and upper bound marginal tax rates. Certainly, doesn’t seem like changes in marginal tax rates are precipitating anything significant in terms of small business formation or destruction.
In the second graph that follows, I plot the small business net job creation rate against the marginal tax rates. Again, there doesn’t seem to be a whole lot of response to marginal tax rate changes.
I fully understand that such simple graphs do not control for the many other important factors affecting small business entry, exit, and net job creation rates and that the impact of marginal tax rates may therefore be masked. Seriously, though, if they mattered that much, if they mattered as much as Boehner and company allege, you would think that at least some semblance of a positive relationship would show up. I certainly don’t see it, but maybe it’s there somewhere.
Photo credit: Philip Taylor PT