Mr. GRASSLEY. Mr. President, I rise to discuss the high rate of taxation that is about to take place if the House of Representatives passes its health reform bill. I would also raise the issue about the effect the same level of taxation--not quite as high--would have under the budget adopted by this body back in March. I wish to address the tax hikes, particularly as they apply to small business, that President Obama and my colleagues on the other side of the aisle have proposed.
The latest tax hike proposal is the House Democrats' graduated surtax of up to 5.4 percent on those making more than $280,000. For those Americans who are married but file separate returns, this surtax increases taxes for those making over $175,000.
I refer to this surtax as a small business surtax because it hits small business particularly hard. Here is how the House's small business surtax works. In 2011 and 2012, singles making between $280,000 and $400,000 will pay an extra 1 percent, those singles making between $400,000 and $800,000 will pay an extra 1.5 percent, and those singles making more than $800,000 will pay an extra 5.4 percent. Then in 2013 and after, these rates go to 2 percent, 3 percent, and 5.4 percent, respectively. The only way the rates do not go up to these levels is if one of the President's advisers, the Director of OMB, says in 2012 that there will be more than $675 billion in health care savings by the year 2019 in the bill the House has recently written. That is right, in addition to the tax questions, we have the House leaving up to a partisan Presidential adviser--not the President himself or a nonpartisan organization such as CBO--that taxes stay up or can go down.
Another troubling aspect of this charade is that this does not deal only with actual savings achieved but instead calls for a partisan's 2012 estimate of savings to be achieved through the year 2019. The Joint Committee on Taxation, a nonpartisan professional group here on the Hill that advises Congress, correctly ignores this charade in its estimate of the House small business surtax and correctly assumes that the rates are actually going to go up after 2013.
In 2011 and 2012, then, for married couples, the small business surtax kicks in at 1 percent for those making $350,000 to $500,000, it rises to 1.5 percent for married couples making between $500,000 and $1 million, and it goes up to 5.4 percent for those making over $1 million. Then in 2013 and later, the rates go up to 2 percent, 3 percent, 5.4 percent, respectively. As discussed above, the only way these rates do not go up in 2013 is if the OMB Director decides they should not go up.
Let's look at this tax increase from the venue of small business. I know people listening, as well as my colleagues, think: You talk about people making $1 million or half a million dollars, why can't they pay another 2, 3, or even 5 percent? It is a situation where small business in America creates 70 percent of the jobs. It is a case of where most small business operates on cash flow, not investment from the outside as normal corporations would. So we are talking about the health of our economy, and we are talking about getting the economy out of this recession we are in.
By the way, the President and I agree that 70 percent of the new private sector jobs are, in fact, created by the small businesses I have just described. However, where the President and I differ is that I believe small businesses' taxes should be lowered, not raised during this time of getting the economy back on track--particularly when you look at the stimulus bill that was passed back in February. It doesn't appear to anybody as if it is doing any good yet, like creating the jobs it was supposed to do, like keeping unemployment under 8 percent, which is now 9.5 percent, and only one-half of 1 percent of that $787 billion stimulus package was to help small business. We ought to be doing something, if we want to revitalize the economy, that helps small business, and increasing taxes on small business will not do that.
In 2001 and 2003, Congress enacted bipartisan tax relief designed to trigger economic growth and to create jobs by reducing the tax burden on individuals as well as small businesses. This included the across-the-board income tax reduction which reduced marginal tax rates for income earners at all levels. I know people do not believe this, but if you look at the allocation of the tax by the highest 1 percent of the people, even after the 2001 tax cut, you saw that highest 1 percent still paying a larger proportion into the Federal Treasury, of income tax, than they were doing prior to that. So even with tax reduction, you end up with a more progressive Tax Code--which nobody is willing to admit, but we can back that up by figures. It also, in 2001, included a reduction of the top dividends and capital gains tax rate to 15 percent and a gradual phaseout of the estate tax.
Unfortunately, the way you have to write tax bills under the reconciliation process around here, those tax bills enacted in 2001 and 2003 will expire December 31, 2010, and automatically we are going to get the biggest tax increase in the history of the country without even a vote of Congress because of sunset.
Some have referred to this bipartisan tax relief as ``the Bush tax cuts for the wealthy.'' However, it seems to be easily forgotten around here, but this tax relief was bipartisan tax relief and provided tax relief for all taxpayers. They have also suggested that the tax relief provided for higher income earners, including many small businesses, should be allowed to expire. The President has proposed increasing the top marginal tax rates from 33 to 36 percent and the other one from 35 to 39.6 percent.
We have a chart here you can refer to, so all these numbers I am giving, you have a reference point for them.
The President has also proposed increasing the tax rates on capital gains and dividends to 20 percent and providing for an estate tax rate as high as 45 percent and an exemption of only $3.5 million.
Also, the President and allies on the Hill have called for fully reinstating the personal exemption phaseouts--we call them PEP, for short--personal exemption phaseouts for those making over $200,000. Then there is another phaseout called the Pease phaseout, named after a former Congressman from Ohio, for those making more than $200,000. So, under the 2001 tax law, when these phaseouts come back in after 2010, you actually end up with higher marginal tax rates of almost 2 percent. It is not 39.6 as the high marginal tax rate; it is something much higher--41 or 42 percent.
You know what you do, you get the smokescreen of saying you don't quite have a 40-percent marginal tax rate, but in fact you do have higher than 40 percent. There seems to be something magical about not exceeding that 40 percent for the benefit of public relations, but it will be exceeded greatly with this 5.4 percent the House is putting in, in their health care bill.
However, like other provisions in the law, PEP and Pease are scheduled to come back in full force, as I just said, in 2011--again, without a vote of Congress. With PEP and Pease fully reinstated, individuals in the top two rates could see their marginal effective tax rates increase by 24 percent or more.
Once again, I refer my colleagues to the chart. For example, a family of four who is in the 33-percent tax bracket in 2010 could pay a marginal effective tax rate of 41 percent after 2010 because of PEP and Pease. This rate would go higher if that family had more children, and this is before the small business surtax is even factored in.
Some of my colleagues, particularly on the other side of the aisle, have defended this proposal by claiming that they will only raise taxes on wealthy taxpayers who make more than $200,000 a year. For the vast majority of people who earn less than $200,000, raising taxes on higher earners might not sound so bad. However, there are consequences for what we do around here. That means many small businesses will be hit with a higher tax bill. These small businesses create 70 percent of all new private sector jobs. These small businesses that are sole proprietors, S corporations, partnerships, and limited law corporations would get hit with the President's proposal to raise the top two marginal tax rates, if their owners make more than $200,000.
In addition, there is just under 2 million small C corporations that are subject to double taxation. To the extent that these C corporation owners make over $200,000 and pay themselves a salary, they would get hit with a tax increase on the top two marginal tax rates proposed by the President. Also, owners of small C corporations who receive dividends or realize capital gains and make over $200,000 would pay a 20-percent rate on these dividends and capital gains after 2010, under these tax-hike proposals. Currently, these pay a rate of 15 percent.
All of this wasn't bad enough for small business. Why emphasize small business? It is the job creation machine of the economy. Why emphasize small business? They operate cash flow, generally. They don't have outside investors. And why emphasize small business? Because it takes entrepreneurs to create jobs. I had the opportunity for 10 years, from 1961 to 1971, to be a union assembly line worker at a little company called Waterloo Register in Cedar Falls, IA. We made furnace registers. I use that company--locally owned, people who got together to create jobs--as an example. They gave me an opportunity to earn a small livelihood for 10 years of my life. It takes people who have means to create jobs. I have never worked for anybody who was low income or in poverty. You have to have the incentive of people in this country to put resources together to create income for themselves and, in the process of expanding, increase jobs for everybody else. So you understand where I am coming from, from the standpoint of small business.
The House of Representatives has proposed a graduated surtax of up to 5.4 percent on those making over $280,000. To people listening, $280,000 is a lot of money, probably the top 3 or 4 percent of the people. But if they are a small business and they are operating with cash flow, cutting into that cash flow is a job killer. With this small business surtax, a family of four in the top two brackets will pay a marginal tax rate in the range of 43 and 46.4 percent in 2013. I am not prepared to say this right now, but maybe when I end I will say something about the State income tax on top of that, to show how high are the taxes these ideas are taking us to.
When you go to 43 and 46.4 by 2013, this would result in an increase of the marginal tax rates by a minimum of 23 percent and a maximum of 33 percent.
Candidate Obama pledged that ``Everyone in America--everyone--will pay lower taxes than they would under the rates Bill Clinton had in the 1990s.'' I am going to show you, if this goes into effect, it is probably the highest rates, going back to the time Carter was President. The small business surtax proposed by House Democrats would violate President Obama's pledge. Therefore, I stand with President Obama in opposing the small business surtax proposed by House Democrats.
According to National Federation of Independent Businesses survey data, 50 percent of the owners of small businesses that employ 20 workers to 249 workers would fall into the top two brackets, backing up what I have continuously said during my dialog with the people. According to the Small Business Administration, about two-thirds of the Nation's small business workers are employed by small businesses with 20 to 500 employees. Do we want to raise taxes on these small businesses that create new jobs and employ two-thirds of all small business workers?
The National Federation of Independent Businesses recently came out with its June report that showed that small businesses continue to have net job losses as well as reduced compensation for those who are still on the payroll; in other words, not part of the 9.5 percent unemployment we have since the stimulus bill passed. With these small businesses already suffering from the credit crunch, do we think it is wise to hit them with the double whammy of up to a 33-percent increase in marginal tax rates.
Newly developed data from the Joint Committee on Taxation demonstrates that 55 percent of the tax from the higher rates will be borne by small business owners with incomes over $250,000. This is a conservative number because it doesn't include flow through business owners making between $200,000 and $250,000 that will also be hit by the Democratic budget's proposed tax hikes. If the proponents of the marginal rate increase on small business owners agree that a 23-percent to 33-percent tax increase for half the small businesses that employ two-thirds of all small business workers is not wise, then they should either oppose these tax increases or present data that show a different result. I wish to fight for lower State tax rates and higher estate tax exemption amounts to protect successful small businesses so people who work a lifetime can pass on without liquidation at the time of death.
In a time when many businesses are struggling to stay afloat, it does not make sense to impose additional burdens on them by raising taxes. Odds are they do nothing then but cut spending. And when their cash flow goes down, probably layoffs happen. They will cancel orders for new equipment as well, cut insurance for their employees, and stop hiring. Instead of seeking to raise taxes on those who create jobs in our economy, our policies need to focus on reducing excessive tax and regulatory barriers that stand in the way of small businesses and the private sector making investments, expanding production, and creating sustainable jobs. We should continue to fight to prevent a dramatic tax increase on our Nation's job machine, the small businesses of America. This includes working to protect small businesses from higher marginal tax rates, an increase in capital gains and dividend tax rates and an increase in the unfair estate tax rate that will penalize the success of small businesses.
In fact, I have recently introduced S. 1381, the Small Business Tax Relief Act of 2009, to lower taxes on these job-creating small businesses. My bill contains a number of provisions that will leave more money in the hands of these small businesses so these businesses can hire more workers, continue to pay the salary of their current employees, and make additional investments in these businesses. The National Federation of Business has written a letter supporting my bill.
Quoting from the letter:
To get the small business economy moving again, small business needs the tools and incentives to expand and grow their business. S. 1381 provides the kind of tools and incentives that small businesses need.
We all want to see the job numbers from the Department of Labor moving in positive directions. We all want to see the unemployment rate plummet. I firmly believe the best way for us to do that is to prime the job-creating engine of our economy by focusing on small businesses. My small business bill, if enacted, will lead to new jobs. This is in the right direction. The House health care reform bill, with the 5.4-percent tax increase, is taking us in the wrong direction. These will be real, countable, verifiable jobs that will be created.
In contrast, President Obama has proposed tax increases that will cause small business jobs to be lost. The newest tax hike proposed is the small business surtax. As with other tax hikes on small business, I oppose the small business surtax. I urge my colleagues on both aisles to do the same.
I ask unanimous consent to print in the Record the NFIB letter from which I quoted.
There being no objection, the material was ordered to be printed in the Record
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